This Bonus Session expands on our in-class GMI discussion on NAFTA and explores the long-term decline in U.S. manufacturing jobs, drawing from research by Acemoglu and Restrepo's 2022 paper, Tasks, Automation, and the Rise in U.S. Wage Inequality. While trade and globalization played a role, the research shows that automation is the primary force behind both the drop in manufacturing employment and the rise in wage inequality since 1980. Its effects have been broad, sustained, and nationwide, particularly displacing routine-intensive blue-collar jobs, even as total manufacturing output continued to grow.

1. Manufacturing Employment Decline

• In 1950, ~1 in 3 U.S. workers had a manufacturing job.
• By 1980: ~20%; by 2016: under 10%; today: closer to 8%.
• The decline occurred despite steady or rising output—indicating productivity gains through automation, not offshoring, were the main factor.

2. Automation’s Impact on Jobs and Wages

• Automation accounts for an estimated 50–70% of changes in the U.S. wage structure from 1980–2016.
• Workers without a high school diploma saw wages fall ~8.8%, with industrial robots alone displacing between 400,000–700,000 jobs from 1990–2015.
• Job loss was concentrated among those performing routine, repetitive tasks, traditionally the foundation of middle-class, blue-collar employment.

3. Trade vs. Automation

• NAFTA and China’s WTO accession caused localized disruptions, but the national employment impact was smaller.
• NAFTA job losses estimated at 200k–800k.
• Increased import competition from China linked to ~2 million lost jobs, but regionally concentrated.
• Automation alone accounts for 3.3–5 million lost jobs, across the entire country.

4. Echoes in the Age of AI
The same task-displacing patterns seen in manufacturing may now emerge in white-collar sectors:

• Generative AI poses risks to routine cognitive tasks (e.g., summarizing reports, drafting standard communications).
• Like factory automation, GenAI may reshape job roles rather than eliminate whole professions.
• The potential outcome: wage polarization, where high-skill workers benefit while middle-tier roles are eroded.

5. Key Differences with GenAI
Despite parallels, AI adoption is moving faster and may be more flexible:

• Potential for task complementarity rather than substitution.
• White-collar workers may adapt more quickly due to higher education levels and geographic mobility.
• Still, the risk of “technological hollowing”—a shrinking middle class—remains.

6. Institutions Matter
Following the arguments in Acemoglu and Robinson's book, Why Nations Fail (which we will discuss in Module 5), a shrinking middle class has repercussions for the long-term economic growth rate in the US, as innovation requires wide-scale participation in economic activities. If "inclusive" institutions do not exist that both allow (via access to education, capital markets, etc.) and encourage (via ensuring new businesses can compete, supporting both small- and large- scale innovation, etc.) widespread economic innovation, long-term growth will decline.

While technological hollowing is possible in white collar sectors with the growth of genAI, it is not inevitable. Recognizing that there are always tradeoffs, there are historical policy precedents in the US that could guide this technological change towards more broad-based growth than what was experienced as automation transformed the US manufacturing sector:

• Workforce investment (e.g., GI Bill)
• Wage subsidies and expanded Earned Income Tax Credit
• Public R&D support (e.g., DARPA)
• Place-based development (e.g., Empowerment Zones)
• Balanced labor standards (e.g., Fair Labor Standards Act)

This Bonus Session summarizes Dr. J's live discussion on tariffs and the US economy held on March 15, 2025.

Main Points - Tariffs

• Theoretical Irrelevance Post-Great Depression: Economists widely agree tariffs generally harm economies based on insights gained since the Great Depression.

• Presidential Power and Constitutional Authority: Presidents have limited short-term influence on economic strength but can negatively impact it, especially through tariffs. While Congress constitutionally controls tariffs, it has delegated substantial authority to the executive branch.

• Political Statements vs. Economic Principles: Economic claims by politicians should be viewed skeptically regardless of affiliation.

False Claims About Tariffs

1. Tariffs Pay National Bills: Tariffs do not cover significant government expenses; they're paid by domestic consumers, not foreign countries.

2. Tariffs Improve Trade Deficits: Increasing tariffs does not sustainably reduce trade deficits. Initially, imports may decline, but currency appreciation makes exports pricier and imports cheaper, nullifying effects. Reagan-era tariffs did not meaningfully reduce deficits. True deficit reduction requires fiscal responsibility—higher domestic savings, lower investments, or reduced government spending.

3. Tariffs Boost the Economy: They do the opposite. Tariffs, as taxes, create inflation and decrease economic output, potentially causing stagflation.

Valid Reasons for Tariffs

1. Protect Domestic Industries: Common rationale; US sugar tariffs benefit domestic producers at consumers' expense.

2. Political Influence/Lobbying: Industries lobby for tariffs to shield their interests.

3. Support New Industries: Temporary tariffs can help emerging sectors develop efficiencies & compete globally, for instance in fields like clean energy and semiconductors.

4. National Security: Protecting vital domestic production (weapons, semiconductors) is a legitimate security concern.

5. Counter Unfair Practices: Tariffs counteract foreign policies (subsidies, weak regulations) granting unfair advantages.

6. Game-Theoretic Responses: Retaliatory tariffs can incentivize negotiation but risk damaging trade wars.

7. Weaponization of Policy: Tariffs might serve broader political strategies, effectively a weapon to obtain unrelated concessions.

8. Smooth Economic Transitions: More gradual adjustments to economic shifts (e.g., post-NAFTA manufacturing decline) reduce instability.

Current State of the US Economy

• Government Spending Cuts: Sharp cuts negatively impact economic growth, particularly affecting regions dependent on government-funded sectors.

• Increased Uncertainty: Economic uncertainty is dampening consumer spending &business investments.

• Stagflation Risk: Persistent tariffs amidst economic slowdown elevate stagflation risks, complicating Fed policy.

• Lagging Indicators: Effects may not be immediately apparent in economic data due to reporting delays.

• Financial System Stability (Currently): Positively, no widespread financial system distress or bank failures exist presently, critical to avoiding depressions. Banks have sufficient reserves, though concerns linger about potential deregulation and reduced capital requirements.

Advice for Individuals/Companies During Uncertainty

• Transparency: Leaders should clearly communicate risks without causing panic.

• Scenario Planning: Inform employees about potential outcomes to prepare effectively.

• Company-Level Focus: Prioritize organizational well-being and strategic positioning over broader economic interventions.

• Leverage Crises: Economic downturns offer opportunities for necessary organizational improvements.

• Cautious Approach: Given uncertainties, cautious monitoring of the situation is recommended.

Overview of Module 4, Section 8: Central Bank Operations in the New Norm, which discusses the evolution of the Fed's monetary policy operations, particularly the transition from a "corridor policy" to a "floor policy" following the 2008 financial crisis.

Main Themes

1. Shift from Corridor Policy to Floor Policy

• Corridor Policy (Pre-2008): This regime operated when reserves in the banking system were scarce. The Federal Reserve used Open Market Operations (OMO) (buying and selling government securities) to adjust the money supply and steer the Federal Funds Rate (FFR) towards its target.
• Floor Policy (Post-2008): The period of significantly accommodative monetary policy, including Quantitative Easing (QE), led to an abundance of Reserves in the banking system. In this environment, changes in the money supply no longer significantly impact the FFR, as banks already hold all the Reserves they desire. The Fed now primarily influences the FFR by adjusting the interest rate paid on overnight Reserve Balances (IORB) held at the Central Bank and the interest rate offered on Overnight Reverse Repos.

2. Key Policy Rates Used in the Floor Policy

• Interest on Reserve Balances (IORB): Only available to banks, this is the interest rate the Central Bank pays to banks on their Reserve balances (similar to the interest rate your bank pays you for your deposits). IORB determines the lowest interest rate a bank would be willing to lend their Reserves because banks have no incentive to lend Reserves at a rate lower than what they can earn by keeping them risk-free at the Central Bank.
• Central Bank Overnight Reverse Repurchase Rate (ON RRP): Available to a broader range of financial institutions such as money market funds (in the US, these institutions must be approved by the Federal Reserve Bank of New York), this is the rate the Central Bank pays for reverse repos. It is conceptually equivalent to the IORB (an entity gives the Central Bank money for a short amount of time and the Central Bank pays them interest), but for a larger group of financial institutions and set slightly lower than the IORB. Analogous to the IORB for banks, the Overnight Reverse Repo rate is the lowest rate at which these non-bank financial institutions would be willing to lend their excess cash.
• Discount Rate: As in the corridor range, the discount rate is the rate at which banks can borrow directly from the Central Bank and is intentionally set above the Federal Funds target rate so that it is only used as a last resort.

3. Mechanism in which the Federal Funds Rate is Managed

• As non-bank financial institutions (such as money market funds) market do not have access to the IORB rate, they lend to banks at rates below the IORB, because doing so still offers a better return than lending through the Fed’s Overnight Reverse Repurchase facility, which offers a slightly lower rate.
• Banks remain the primary borrowers in the federal funds market. But rather than borrowing to meet liquidity needs, they do so to profit from arbitrage. Specifically, banks borrow cash from nonbanks at rates below IORB (for example, from a money market fund at 5.30%), and then immediately redeposit those funds at the Fed to earn IORB (e.g. 5.40%), capturing the spread as risk-free profit.
• The federal funds rate is then pinned down between these two rates and reflects the price nonbank institutions are willing to accept for lending cash, and banks are willing to pay, to facilitate this arbitrage.

4. The New Norm

• The floor policy is expected to remain in place until the excess reserves created by QE are reduced. This unwinding is occurring through the Fed ceasing to reinvest maturing assets and through outright sales of Treasury securities and agency mortgage-backed securities.
• As reserve levels decline and the demand for reserves increases, the Fed could eventually transition back to a corridor policy and potentially lower the IORB back to zero. However, this is expected to be a gradual process.

Overview of Module 4, Section 7: Central Bank Operations in "Normal" Times, which discusses mechanisms through which Central Banks manage the overnight bank-to-bank lending rate during “normal” economic periods. i.e. in periods prior to significant events like the 2008 Financial Crisis.

Main Themes

1. The Overnight Bank-to-Bank Lending Rate as a Key Monetary Policy Tool

• The overnight bank-to-bank lending rate (in the US, the federal funds rate), the interest rate at which banks lend reserves to each other overnight, is the central lever for monetary policy. Central banks aim to influence this rate to achieve broader economic objectives.

2. Supply and Demand of Reserves

• The federal funds rate is determined by the equilibrium between the supply and demand for bank reserves.
• Demand for Reserves: Banks demand reserves for various reasons, including meeting reserve requirements, hedging against liquidity risk, and potential speculative opportunities. The demand curve for reserves is downward sloping because as the federal funds rate decreases, banks have less incentive to lend out excess reserves and are more willing to hold onto them. Expectations of future interest rate increases can also shift the demand curve outward.
• Supply of Reserves: The Central Bank is the sole entity capable of creating reserves. The supply of Reserves is a policy decision and is represented by a vertical line at the quantity set by the central bank.

3. Central Bank Tools to Influence the Federal Funds Rate

• Open Market Operations: Buying and selling government securities (primarily Treasuries) is the primary tool to shift the supply of Reserves. Purchasing securities injects reserves into the banking system (shifting the supply curve outward and typically lowering the federal funds rate), while selling securities withdraws Reserves (shifting the supply curve inward and typically raising the federal funds rate).
• Discount Rate: This is the interest rate at which commercial banks can borrow money directly from the Central Bank. The discount rate acts as a ceiling for the federal funds rate because banks would be unlikely to borrow from other banks at a rate higher than what they could obtain from the Central Bank.
• Required Reserve Ratio: This is the fraction of a bank's deposits that they are legally required to hold in reserve at the Central Bank. Increasing the Reserve Ratio forces banks to hold more Reserves, shifting the demand curve for Reserves outward and typically increasing interest rates. Decreasing the ratio has the opposite effect.
• Interest on Reserve Balances (IORB): This is the interest rate that the central bank pays to commercial banks on the Reserves they hold at the central bank. The IORB acts as a floor for the federal funds rate because banks would be unwilling to lend Reserves to other banks at a rate lower than what they can earn by simply holding those reserves at the Central Bank. Prior to the financial crisis in the US, this rate was generally 0%.

Overview of Module 4, Section 6: Quantitative Easing, regarding Quantitative Easing (QE) as implemented by the Federal Reserve, particularly during &after the 2008 Financial Crisis and during the COVID-19 pandemic.

Main Themes

1. Definition and Purpose of Quantitative Easing (QE)

• QE is described as credit easing without sterilization focused on a much larger range of assets, specifically those having long maturities.
• The primary goal during the Financial Crisis was to address the risk stemming from Asset-Backed Securities by purchasing them from banks &financial institutions.
• QE aimed to remove almost worthless assets off the banks’ balance sheets, significantly improving their risk profile and increasing bank Reserves to encourage lending.
• The underlying issue during the Financial Crisis wasn't a lack of Reserves but instead the extreme amount of risk on banks’ balance sheets due to the loss of almost all market value of their asset backed securities. Banks were hesitant to lend or borrow until these risky assets were off their books.

2. Implementation During the 2008 Financial Crisis

• The Fed initially implemented credit easing measures, acting as a wholesale lender to banks, sometimes with sterilization (keeping the money supply constant) and sometimes without (increasing the money supply).
• These initial measures provided temporary relief, as seen in the rise of S&P financials and the decrease in credit default swap spreads.
• However, the failures of institutions like Bear Stearns led to a rapid escalation of the crisis, and these initial tools proved insufficient.
• The Fed then moved to large-scale asset purchases (QE Round 1), primarily focusing on ABS.
• This took $1.1 trillion off the books of banks & other financial institutions around the world and significantly increased Reserves.
• As with most Fed policies, the strategy involved a gradual approach based on macroeconomic conditions. Subsequent rounds of QE (Rounds 2 and 3) continued to purchase assets to further ease financial conditions .

3. Quantitative Easing During the COVID-19 Pandemic

• Most of the COVID Quantitative Easing was in the form of Treasuries, Central Banks’ preferred monetary tool. More than $1 trillion dollars in Treasuries were purchased to inject massive liquidity into the system, along with some $200 billion in ABS.

4. Unwinding Quantitative Easing (Quantitative Tightening - QT)

• The Fed has started unwinding Quantitative Easing (i.e. Quantitative Tightening) by letting some of the assets mature (and not purchasing new debt with it) and selling some of the assets. This is equivalent to decreasing the money supply.
• Fed statements indicate QT is occurring by phrasing such as “the Fed continues to reduce holdings of Treasury Securities and agency debt and agency mortgage-backed securities.”
• The primary method of QT has been through the Fed selling its Treasuries. The Fed is proceeding more cautiously with selling ABS to avoid triggering a fire sale and causing prices to plummet again.

5. Transparency and Monitoring of the Fed's Balance Sheet

• The Fed publishes its balance sheet every week on Wednesdays. It can be accessed on the Fed website and through FRED.
• The balance sheet details Assets (like Treasury securities and Mortgage-backed securities) and Liabilities (like Currency and Reserves).
• Changes in these holdings, particularly in Treasury and ABS, reflect the implementation and unwinding of QE.

6. Risk and Considerations

• There is a moral hazard tradeoff when Central Banks intervene in markets in which investors accepted excessive risk without due diligence in order to obtain short-term gains.
• During the 2008 crisis, the systemic nature of the problem justified the intervention to prevent a global financial meltdown.
• There is significant political sensitivity towards a Central Bank purchasing industry-specific assets, particularly before a crisis is fully evident.

Overview of Module 4, Section 5: The Financial Crisis, which introduces the Federal Reserve's balance sheet and the tools it employs to manage the money supply & influence interest rates.

Main Themes

1. Short-Term Collateralized Financial Products: Repurchase Agreements (Repos) and Reverse Repurchase Agreements (Reverse Repos)

Repo (RP) A financial product involving the purchase of securities (generally Treasury securities) coupled with an agreement to sell them back at a future date for a slightly higher price. It's a short-term lending agreement used to earn a small return on excess cash with low risk.

• Central Banks use repos to inject liquidity into the financial system (increase money supply) and lower interest rates by providing short-term loans to banks (collateralized by securities), increasing the Reserves in the banking system.
• Repos allow financial institutions to borrow for very short time-periods against assets they own.

Reverse Repo (RRP) A financial product that involves the sale of securities coupled with an agreement to purchase them back at a future date for a slightly higher price. It's a short-term borrowing agreement used to manage short-term liquidity needs.

• Central Banks use Reverse Repos to remove liquidity from the financial system (decrease money supply) & raise interest rates by acting as a borrower, taking in money from financial institutions in exchange for securities, thus decreasing the Reserves in the banking system.

2. The Fed’s Balance Sheet

• The Fed's balance sheet has assets (things the Fed owns or that pay it interest) and liabilities (things the Fed owes to others or pays interest on).
• Assets: Primarily include U.S. Treasury securities, Repos, and Other Assets including foreign reserves and gold. During crises, the Fed’s balance sheet can expand to include other assets including asset-backed securities and longer-term loans.
• Liabilities: Primarily include Currency in circulation (a liability as it technically belongs to the government), Reserves held by banks at the Fed (on which interest may be paid), Reverse Repos (the Fed owing money), the Treasury General Account (the U.S. govt's checking account), and other smaller Liabilities including the Capital used to originally fund the Fed.
• The size of the Fed's balance sheet is a key indicator of the money supply. An increasing balance sheet generally indicates an increase in the money supply.

3. Open Market Operations (OMOs)

Under "normal" economic conditions, OMOs are the primary tool the Fed uses to maintain the federal funds rate.

• OMOs involve the sale and purchase (or temporary trade via Repos & Reverse Repos) of primarily Treasury securities to eligible banks in exchange for Reserves.
• To increase the money supply, the Fed purchases Treasuries from banks and increases the Reserves in the system, which banks will likely use for loans.
• To decrease the money supply, the Fed sells Treasuries to banks, which decreases the Reserves in the system as banks pay for the securities.

4. Credit Easing

• Credit easing is employed during periods of heightened risk or a "credit crunch" when lowering the federal funds rate does not significantly increase borrowing & lending. This occurs as lenders become cautious and prefer low-risk assets (like Treasuries) or increased Reserves.
• The Fed acts as the short-term lender of last resort through mechanisms such as purchasing or accepting as collateral a broader range of riskier assets. The goal is to reduce the risk exposure of banks, making them more willing to lend their Reserves.

• Credit Easing with Sterilization: The Fed can implement credit easing without increasing the money supply by selling an equivalent amount of Treasuries, pulling the newly created Reserves back out of the system. The effect is to shift risk from banks to the Fed while providing liquidity without inflationary pressure.

• During the 2007-2008 credit crunch, the Fed initially used normal credit easing measures with sterilization.

Overview of Module 4, Section 4: The Financial Crisis, which summarizes the four phases of the 2008 Financial Crisis, which ultimately resulted in a near collapse of the global financial system.

Four Phases of The Financial Crisis:

Phase 1: The Bursting of the Housing Bubble

• The crisis originated with a significant housing bubble. Home prices peaked nationally in July 2006 and subsequently dropped by 9% in less than two years, with some major cities experiencing declines of over 20%.

Phase 2: ARM Credit Crunch

1. The increase in mortgage debt, particularly in the subprime market since 2000, was fueled by Adjustable Rate Mortgages (ARMs) and Interest-Only Mortgages. These were manageable during the bubble due to the ability to refinance with low rates as debt-to-equity ratios decreased with rising home prices.
2. However, when the housing bubble burst, debt-to-equity ratios sharply increased, preventing borrowers from refinancing. As ARM terms ended, borrowers faced higher monthly payments they couldn't afford, leading to a surge in delinquencies and foreclosures. As borrowers faced higher monthly payments as ARM terms ended and were unable to refinance, delinquencies and foreclosures more than doubled.

Phase 3: The Collapse of the Asset-Backed Securities (ABS) Market

1. The mortgages that underpinned Asset-Backed Securities (ABS) lost value due to rising non-payment and foreclosure rates. Consequently, the prices of these ABS sharply declined. Any ABS rated below AAA became almost worthless. And even AAA ABS financial products experienced a 60% reduction in value.
2. Banks held significant amounts of these ABS on their balance sheets, often financed with short-term funding. As the value of these assets plummeted, it created a severe credit crunch. Given the prevalence of these products on balance sheets financed with short-term funding, all major bank risks coalesced in rapid sequence.
3. The rush to sell ABS securities (i.e. a fire sale) was exacerbated due to the lack of due diligence in underwriting standards, by credit agencies, and by those purchasing the Asset Backed Securities. There was not a clear understanding of what risk exposure existed within ABS products, even those rated AAA.
4. Even ABS with low-risk profiles became worthless on the secondary market, hindering banks' liquidity despite the underlying mortgages still generating reasonable returns.

Phase 4: The Spread of Contagion and Bank Failure

1. Freddie Mac's warning and New Century Financial's failure (2007) Freddie Mac indicated the higher-than-perceived risk of subprime ABS, and New Century Financial, a leading subprime lender, filed for bankruptcy. This caused a panic in the ABS market.
2. Northern Rock's failure (February 2008):The failure of a major UK bank highlighted the global nature of the crisis and continued stress in the financial sector.
3. Bear Stearns' acquisition (March 2008) JPMorgan Chase acquired Bear Stearns, indicating escalating stress and the potential for further contagion, though this intervention provided some control.
4. IndyMac's failure (July 2008) The failure of IndyMac, a $30 billion thrift, due in part to a bank run, illustrated the accelerating speed at which contagion was occurring.
5. Fannie Mae and Freddie Mac conservatorship (September 2008) The government placed these organizations into conservatorship, further devaluing mortgage-backed assets due to the strong negative signal this represented.
6. Lehman Brothers' bankruptcy (September 2008) Lehman's sudden failure, heavily exposed to ABS risk and deeply interconnected with other financial institutions, brought the global financial system to the brink of collapse.
7. AIG's near failure (September 2008) As AIG had insured many of Lehman's losses, its inability to pay back claims threatened to trigger a complete meltdown of the financial system. Had they failed, every bank with risk hedged by AIG would suddenly have significantly larger amounts of risk on their books.

Overview of Module 4, Section 3: Crisis Precursors, which focuses on the events and conditions that led to the 2008 Financial Crisis.

Main Themes

The Rise and Proliferation of Asset-Backed Securities (ABS) The securitization of debt, particularly mortgages, played a central role in the lead-up to the crisis. ABS transformed illiquid loans into tradable assets, offering benefits like liquidity and risk transference for issuers and access to diversified assets for investors. However, this also obscured and amplified underlying risks.

The Expansion of Subprime and Affordability Mortgages The growth of subprime mortgages (loans to borrowers with higher default risk) and affordability products (loans with features like low initial rates and flexible qualification criteria) increased the volume of risky debt in the system. It was not uncommon to see aggressive sales tactics and the focus on immediate affordability over long-term sustainability.

Adjustable Rate Mortgages (ARMs) as a Catalyst for Payment Increases ARMs, with their initial lower fixed-rate periods followed by upward adjustments based on market rates, created a ticking time bomb. When these initial periods ended and interest rates rose, many borrowers, particularly subprime borrowers, could not afford the increased payments, leading to defaults.

Lax Underwriting Standards and Lack of Due Diligence The process of originating and securitizing mortgages led to a decline in underwriting standards. Originators, knowing they would quickly sell the loans, had less incentive to thoroughly assess borrower creditworthiness.

The Role of Non-Bank Lenders ("Shadow Banks") The rise of non-bank financial institutions in mortgage lending significantly altered the financial landscape. These less regulated entities issued a large portion of the new credit, bypassing traditional banking regulations. This reduced the effectiveness of Federal Reserve interest rate policies on mortgage rates.

The Housing Bubble and its Burst A significant and rapid increase in home prices between 2000 and 2006 fueled the mortgage boom. This created a bubble where prices were driven by speculation and the expectation of continued appreciation. When this bubble burst, starting in the summer of 2006, many borrowers found themselves underwater (owing more than their homes were worth), further exacerbating defaults.

Falling Long-Term Interest Rates For decades leading up to the crisis, long-term interest rates had been falling due to global factors, making borrowing cheaper. However, while the Federal Funds Rate increased, mortgage rates did not rise proportionally due to the influx of lending from the non-bank sector.

Increased Household Debt Aggregate household debt as a share of disposable personal income rose dramatically, indicating that a larger portion of income was being used to service debt, leaving less buffer for economic shocks.

Systemic Risk and Contagion The interconnectedness of the financial system through ABS meant that defaults in one part of the mortgage market could quickly spread throughout the system, leading to widespread losses and a credit crunch. When homeowners began to default, the value of ABS declined, impacting the balance sheets of financial institutions holding these securities.

Regulatory Capital and Funding Risks Large financial institutions significantly increased their leverage by borrowing heavily on short-term markets to purchase ABS. This created a situation of high capital inadequacy risk and reliance on unstable funding.

Hindsight Bias and the Gradual Nature of the Crisis Looking back, the causes of the crisis seem obvious. However, at the time, the situation developed relatively quickly, and various factors (like the aftermath of 9/11 and the dot-com bust) diverted attention from financial regulation. Furthermore, many believed that the new financial products and the housing market would remain stable.