Five Years Later

By James Kwak

Five years ago, Lehman brothers went bankrupt, AIG was nationalized, Ben Bernanke stared into an abyss, and Mohamed El-Erian asked his wife to take out as much cash from the ATM as she could. And Simon and I started blogging.

I already wrote my anniversary reflections on the financial crisis for The Atlantic. Here I wanted to talk a bit about how this blog started.

This is a story I’ve told in person many times, so you should bear in mind that the stories we tell often are the ones we tend to misremember the  most, for neurological reasons. As I recall, on Thursday, September 18, Henry Paulson presented his initial, three-page proposal for TARP. At the time, I was in something like my third week of law school, having just left the company where I worked for seven years. Simon had left the IMF I think the month before. I remember thinking the thought that I’m sure many of you had: if Treasury bought toxic assets at fair market value, that would only lock in banks’ losses and prove that they were insolvent; if it paid book value or something close to it, that would help the banks but would be a massive taxpayer subsidy. The next day, however, as far as I could tell, the media basically missed this point. On Saturday I talked to Simon and suggested writing an op-ed about what seemed to me (and probably ten thousand other people) a crucial problem, and on Sunday we drafted something.

On Monday, the Washington Post contacted Simon (remember, he had just left the IMF the month before) and asked if he had anything to say about the impending collapse of modern society—which, by chance, he did. But our draft was far too long (I didn’t know about the 800-word rule, which is a standard for print opinion articles), so we cut it down to focus on the governance issue, which turned out to be far more important than I think we even suspected at the time. (Think about TARP, PPIP, Neil Barofsky, Elizabeth Warren, et al.) I skipped my torts class to do the final edits—but I did tell the professor in advance. We had some excess material on the pricing issue, so Simon submitted that to Martin Wolf’s online forum at the FT.

And I thought I was done—I would go back to taking classes and enjoying having no real responsibilities (other than familial) after eleven years of work. Simon, though, pitched the idea of a blog, and that’s how The Baseline Scenario began. Like any blog, we had virtually no readers at the beginning, but we got cited by some of the big fish (like Mark Thoma, to whom I am forever grateful), and things grew from there. I remember thinking that if we didn’t get to 10,000 daily page views or something (I forget the actual number) within six months I would stop, and for a while it looked like we wouldn’t get there. But then Simon wrote a post about the American oligarchs, Bill Moyers invited him on TV, Krugman cited us a couple of times, and I was stuck.

Then there was the Atlantic article, which opened up the possibility of writing a book, which seemed like a fun thing to do—and it seemed unlikely I would ever have the opportunity again. The book was popular—in part because the SEC sued Goldman Sachs two weeks after it was published, so Bill Moyers devoted almost an entire show to us—and, to my surprise, made it possible for me to become a professor. And that’s how I became a professor, rather than a lawyer (which was the plan when I went back to school).

So why am I boring you with the story of this latest chapter in my life? To me, these past five years have been a lesson on the overwhelming importance of serendipity. There was a dramatic financial crisis, which gave us something to write about. I had just left my job and enrolled in the easiest law school in the country, which gave me time to think and to write. Simon had just left his job, which meant he could take positions in public other than those of the IMF. The Washington Post asked him out of the blue if he had anything to submit. (For ordinary mortals like us, it’s pretty hard to crack print op-ed sections.) I had dinner with some of my new classmates and ended up explaining CDOs and CDSs to them, which was the inspiration for our “beginners” posts. Bill Moyers read Simon’s post. The SEC sued Goldman just as our book came out. And, during my last year in law school, the UConn law school was hiring. (UConn is one of only two law schools within an hour of my house, and I wasn’t about to move.) And there was plenty of what turned out to be good fortune in earlier years, as well, such as my not getting a job as a history professor, which would have sent me down a completely different path.

As I’ve gotten older, I’ve become more and more convinced that we get where we are because of luck as much as anything else, in the business world as well as the academic world. This is one reason I have the positions that I do on taxes and social insurance.

That’s also one of themes of Michael Lewis’s story for This American Life a about Emir Kamenica, who resolutely insists that he is where he is because of a freak occurrence—an English teacher reading an essay he plagiarized from a Bosnian novel (stolen from a library as he was escaping a war that killed his father) and getting him into a good private school. The people who think that they deserve everything they have because they are geniuses and worked hard all their lives are, in more or less Lewis’s words, “just like every miserable bond trader at Goldman Sachs.” And who wants to be like that?

22 thoughts on “Five Years Later

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  3. Thank you James Kwak and Simon Johnson; without your blog and efforts (as well as your tolerance for fee speech and opinion) a great deal of communication would have been mute silence.
    Let’s not slow down now!

  4. I guess that may have been a Freudian slip…but it should be
    “FREE SPEECH” in that last Hurrah!

  5. Hey guys – just wanted to thank you for providing the world of *real* people (as opposed to those who live drinking the investment banking kool-aid) with a precious perspective on *how* the machinery really works. Since I first read (and forwarded to many friends) The Quiet Coup, it has been a sad and harrowing trip.
    But as they say, “a pessimist is just a better informed optimist”.

  6. Important stuff you guys do, Professor James — many thanks to you both for your work.

    Bill Clinton has said that change in America is really only possible at the margins, the hint being that the entrenched interests are too powerful to fight head-on. But your well-reasoned contributions always enlighten the discussion and help to keep the efforts alive and worthwhile. You are much appreciated.

  7. James, a great story. Your blog is one of two (the other being New Economic Perspective) to which I subscribe. Most articles are interesting and well written, and the replies are, for the most part cogent and well conceived. It is a pleasure having such material available. You and Simon do a wonderful job of keeping things simple and informative (and educational).

  8. Great summary of the first year here at The Baseline Scenario, Professor Kwak. I had no idea about the many confluences surrounding how you and Simon came together so it’s nice to read about it. I finally got around to reading “13 Bankers” this year and I wanted to comment on what a master work on the financial crisis (and beyond) that it is. Thanks for all the hard work and many hours you’ve put in writing for this blog – I have always found it incredibly informative.

  9. There was another blog started in 2008 (and not by a law school student) that has had a real impact on economic policy. Without it I doubt Ben Bernanke would have said what he did yesterday;

    Speaking of ‘five years after’, Peter Wallison has a good question in the WSJ, Why so quiet now, HUD?

    ‘There was a time when HUD was not so modest. In 1992, Congress adopted the ironically named Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act, giving HUD the authority to administer the legislation’s affordable housing goals. The law required Fannie Mae and Freddie Mac, when they acquired mortgages from lenders, to meet a quota of loans to borrowers who were at or below the median income where they lived. At first, the quota was 30%, but HUD was authorized to raise the quota and over time it did, eventually requiring a quota of 56%. In those heady days, HUD was pleased with its work.

    ‘In 2000, for example, when then-HUD Secretary Andrew Cuomo was raising the quota to 50%, the agency actually sounded boastful about its role. Describing the gains in homeownership that had been made by low- and moderate-income families, HUD noted: “most industry observers believe that one factor behind these gains has been improved performance of Fannie Mae and Freddie Mac under HUD’s affordable lending goals. HUD’s recent increases in the goals for 2001-03 will encourage the GSEs to further step up their support for affordable housing.”‘

    Which explains why 3/4 of all sub-prime ended up in GSE hands by 2008. But, what could that have had to do with the financial crisis.

  10. My comment was supposed to go to John Abraham-Watne (- I hit Reply to his post, but it somehow ended up here and I don’t know how to delete it.)

  11. This blog has helped many better understand the financial world. I have read it religiously. Thank you for your efforts. Here is hoping that you continue.

  12. David McCullough develops the idea of accident as determining history in “1776.” I got “1776” as a Xmas gift and didn’t think I’d like what I assumed would be a history without political economy. But, he tells a great story, where the the decision to break from England and the outcomes of battle are determined by accident and luck.

    With regard to how we get where we are, you seem to work hard to discover the obvious. Everything we have comes from the gift we have from nature and from the collective efforts of others. Our culture is a gift from others and without that gift we would be naked and ignorant, without fire, language, tools, or writing. We would have to discover everything anew. Only a deluded or ignorant person would think his petty contributions and accomplishments are his alone or significant against gifts of history and nature.

  13. Thanks, I learned a lot. I despised economists but 5 years later I merely distrust them, as you would a real estate agent. You provided a lot of good reads in the beginning but then the haters started posting replies and the site became polluted. I admire you for never filtering out the bores and ranters. Just let free speech prevail. That’s how we ended up with the Tea Party.

  14. So what does all this *negotiating* for the fine do to the Equifax Credit Rating of Dimon, himself? At what rate can he borrow money after he committed so many creative financial transactions?

    And the London Whale was a Khazar *Russian*, right? Then he knows what kind of justice he would do onto others….

    Close your eyes and cover your ears, kiddies….don’t look at the light…..

  15. I think I can safely say I am one of the top 5 (not in contributions or intellect, but in loyalty and faithful following) commenters of this blog and the ventures (bylines and books) which have flowed out of it. Although I have changed my pseudonym at least once. Some of the more observant readers might pick up who I was before from my crotchetiness and consistent ideological hangups.

    What I want to say is, I had been overseas for multiple years (nonmilitary) and was experiencing a degree of reverse culture shock at the time. I was watching Bill Moyers on PBS and trying to “get my bearings” again on what was going on, and what was at the crux of my native country since my absence. So it was Bill Moyers’ PBS Program who introduced me to this blog. Some may remember at the time there was a show called “NOW” that preceded Moyers show every week which was quite good other than being overly whiny about immigration issues. Anyway, I am grateful to Moyers for introducing me to this blog as it has been a great source of education and also making me feel I am once again connected to the crux/core of what are the main concerns of this nation we call The “United” States.

    Although the blog has wandered away some from what I think makes it special (finance, prudential regulations, and corporate governance), it has enriched my life very much in those 5 years. And I can honestly say (hopefully without being melodramatic) I will always be grateful to Sirs Kwak and Johnson for this blog.

  16. Let’s hope this blog can outlast some of the naysayers. I don’t know what the current line in Vegas is. Suffice it to say, I’m shorting David Brooks:

  17. David Brooks on NBC’s “Meet The Press August 11, 2013:

    BROOKS: Yeah, I think the audience has changed online. I think there’s been a return to authority. You know, I used to read blogs, and you’d kind of be reading something interesting, and then the blogger would write, “Well, I’ve got to quit now. I’m going off to junior high.” I realized I’d been reading a 12-year-old.
    But I think there has been a return away from some of that toward, whether it’s online or in print, a return to quality. People who actually make the calls, who are not speculating, who are reporting. And I think there’s been a return to that sort of stuff.

    And so I’m a little more of the belief that the old media is going to continue. Look at ebooks; they’ve hit a plateau. Look at online; it’s hitting a plateau, I think. And so I think we’re going to be stunned by how much of the old media, whether it’s delivered online or not, is going to be around, as the audience returns to authority.”

    (that last part I highlighted doesn’t sound elitists at all does it??? Notice how often David Brooks speaks as though the terms “authority” and “journalistic integrity” are interchangeable/synonymous)

    Then, on the same show, Kara Swisher (formerly of the Washington Post, now working as Editor of calls Brooks out on his shallow and non-substantive remarks:

    KARA SWISHER: You’re using terms, “old media.” Why are you doing that anymore? I mean, it’s kind of like — is it because you’re old or whatever? But that’s not the case.
    DAVID BROOKS: I’m not that old.

    KARA SWISHER: No, I know that. I’m also old. But the fact of the matter is, the fact that you’re using terms “old media” and “new media,” it’s changed completely. For example, we have a staff of six people covering tech. Very small, lean staff. We pay our reporters very well. We broke a lot of the major news stories when every other bureau has larger [numbers of] people. It’s not a function of cost; it’s not necessarily a function of having this old institution. It’s a function of embracing these tools and doing the same thing.

    DAVID BROOKS: I was —

    KARA SWISHER: I think people are just resistant to the change, and they have to say “blogs” as if it’s an insult. They have to, like, separate them. And they’re all part of a living, breathing news organization that has to use these tools. It’s like arguing against printing presses. You know, monks arguing against Gutenberg. I just don’t understand why —

    DAVID BROOKS: Yes, I’m not sure we’re disagreeing. I would say when you look at projections of the future, go back, look at how people predicted the future, they always underestimated the extent of technological change. They always overestimated a sense of behavioral change. So the technology’s going to change, but what people want to read is going to be basically the same —

    KARA SWISHER: But the consumers are way ahead of you.

    You can see the video of David Brooks’ comments to get the entire context, in this link (Brooks comments start at the 5minutes and 10 seconds mark):

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