Since the summer of 2007, the U.S. financial system and economy have been undergoing a painful transition, which is also playing out in the Atlanta area. Many are wondering how we got here and what Atlanta’s fate will be in the current financial crisis. I believe Atlanta has many underlying strengths that will help the region weather the economic storm. But to understand this conclusion, it’s helpful to review what’s happened.
In July of last year, rating agencies downgraded certain residential mortgage-backed securities. These actions precipitated a general repricing of risk in the financial system and, in turn, a slow cascade of worsening conditions, culminating in recent dramatic market developments and ongoing government policy responses.
The financial stresses that grew over the last 14 months have affected financial institutions, the credit system, investment capital markets, individual businesses and households and an already weak overall economy. The problems ranged from constricted bank-to-bank lending on short-term loans to stifled bond issuance to much reduced flows of bank credit and, most recently, significant declines in equity markets.
The public policy response, including the Federal Reserve’s various measures to provide much-needed liquidity to markets, has been equally dramatic. These measures include a comprehensive plan to directly address financial problems and agreements with other governments on globally coordinated actions.
This forceful response by the U.S. Treasury, Congress, the Federal Reserve and collaborating governments distinguishes today’s crisis from past economic crises like those leading to the Great Depression in the 1930s and the “lost decade” of the 1990s in Japan. In these prior episodes, policy responses were neither timely nor strong enough to avert long-lasting problems.