SGS Brownbag: Thomas Grosso, HEC Lausanne

The 2008 financial crisis was the worst crisis since the great depression, unemployment skyrocket around the world, millions of people lost their home their jobs and fell into poverty, it was the first time since WWII that the world’s GDP contracted and many countries have yet to get back to their pre-crisis GDP level. However unlike the recent covid pandemic, or earthquake in Turkey and  Morocco this crisis was not an Act of God, it was purely man-made, so it is important that we understand its causes, and the mistakes that we collectively made, to avoid as much as humanly possible to repeat them.

This paper aim to understand how a group of people who bear some responsibility for the catastrophe, top US regulators, thought about the crisis’s origin. In particular how they thought about it right after the crisis unfolded  and 6 to 12 years later. The crisis can be thought as the unintended consequence of (some of) their work, so I am interested as to how they cope with that, what strategy do they use to cope with this unintended outcome.

To this effect I select 3 prominent regulators from that period, Bernanke, Geithner and Paulson and conduct a discourse analysis on several  of congressional and senatorial hearings in the 2008-2010 period and then on the various memoirs they wrote in the following decade. The analysis reveal that they all used, with remarkable stability over time,   various processes involving strategic ignorance, I describe these processes and how they harness ignorance.

These regulators are far from being the main responsible of the crisis and their willingness to use extra-ordinary measure in September 2008 is clearly commendable, yet the analysis reveal that when it comes to taking responsibility for their limited part in the crisis occurrence, they may not be there yet, suggesting that we take their discourse about the crisis with some reservation.