Big Debt Crises by Ray Dalio

Author:Ray Dalio [Dalio, Ray]
Language: eng
Format: epub, azw3
Publisher: Bridgewater
Published: 2018-09-10T04:00:00+00:00

As shown below, the same was broadly true across the developed world.

For all these reasons, a global financial bubble was emerging.

In the middle of 2006, Hank Paulson was confirmed as George W. Bush’s Treasury Secretary. He came to that job from the position of chairman and CEO of Goldman Sachs, which gave him an exposure to the markets that made him generally concerned about the excesses in the financial markets, so he convened and held regular meetings with the President’s Working Group on Financial Markets, which was comprised of the top members of the Bush economic team and key regulators.4 The primary benefit of these meetings was that they built close working relationships among the members, most importantly between Paulson, Fed Chairman Ben Bernanke, and New York Fed President Tim Geithner, and their agencies.

In all financial crises, the personalities, capabilities, and ability to work well together play crucial roles in influencing the outcomes. In this case, the most important relationships were between Paulson (an extroverted former CEO who was used to making bold decisions), Bernanke (an introverted economist who was well-schooled in the Great Depression), and Geithner (a practical operator experienced in the workings of government economic policy making). Their complementary qualities, in combination with their often hourly coordination and their shared willingness to be bold and quickly evolve policies based on new learnings, were critical to their navigating through this crisis.

While all three men had concerns about the “dry tinder and gathering storm,” and tried to lean against the excesses that they perceived, the problems weren’t clear enough to them to prompt them to move quickly or forcefully enough to prevent what was to come. They noted the excesses in the subprime market, but none saw these excesses spilling over to the overall housing market, which had not seen a nationwide decline since World War II. Paulson, however, was very concerned about the risks posed by Fannie Mae and Freddie Mac (known as Government Supported Entities, or GSEs), which Larry Summers also highlighted when he was Treasury secretary in the Clinton administration. That prompted Paulson to get President Bush’s support in the fall of 2006 to begin working on legislation with Barney Frank (then the ranking minority member of the House Financial Services Committee) to reform those entities, though that push didn’t lead to progress until the crisis came to a head in the summer of 2008.5

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