Phillip Swagel: This paper reviews the events associated with the credit market disruption that began in August 2007 and developed into a full-blown crisis in the fall of 2008. This is necessarily an incomplete history: the paper is being written in the months immediately after I left Treasury, where I served as Assistant Secretary for Economic Policy from December 2006 to the end of the Bush administration on January 20, 2009. The focus here is on key decisions made at Treasury with respect to housing and financial markets policies, and on the constraints faced by decision makers at Treasury and other agencies over this period. I will focus on broad policy matters and economic decisions and not go into the financial details of transactions such as with the GSEs and AIG. A key point of emphasis is to explain constraints on the policy process -- legal, political, and otherwise -- that were perhaps not readily apparent to outsiders such as academic economists or financial market participants. Some steps that are attractive in principle turn out to be impractical in reality -- with two key examples being the notion of forcing debt-for-equity swaps to address debt overhangs and forcing banks to accept government capital. These both run hard afoul of the constraint that there is no legal mechanism to make them happen. A lesson for academics is that any time the word "force" is used as a verb ("the policy should be to force banks to do X or Y"), the next sentence should set forth the section of the U.S. legal code that allows such a course of action -- otherwise, the policy suggestion is of theoretical but not practical interest.
From the archive, Niall Ferguson: This hunt for scapegoats is futile. To understand the downfall of Planet Finance, you need to take several steps back and locate this crisis in the long run of financial history. Only then will you see that we have all played a part.
From Decius, last November: If we have a bunch of people waltzing into the whitehouse who do not appreciate the full implications of the use of the word "require" by a policy maker, we are in very serious trouble.
The Financial Crisis: An Inside View | 
