Keeping an eye on what is happening with “disappeared” journalist Khashoggi, it would appear that a full-blown diplomatic incident is looming. This is not surprising. Journalists often “disappear” in Saudi and in the United Arab Emirates. This is how Al Monitor reports the incident.

 

Disappearance of Saudi journalist puts Erdogan in difficult situation

Semih Idiz October 9, 2018

 Article Summary

The potential for a full-blown crisis between Turkey and Saudi Arabia remains in the cards.

The disappearance of Saudi journalist Jamal Khashoggi, who was last seen entering the Saudi Arabian consulate in Istanbul last week to obtain documents necessary to marry his Turkish fiance, is a new headache for President Recep Tayyip Erdogan.

The affair — which involved gruesome allegations of murder by Saudi agents — has the potential to cause a serious rift between Turkey and the principal Gulf state at a delicate moment for Ankara with regards to developments in the Middle East.

The Turkish-Saudi relationship is one of superficial cordiality, but it's otherwise known to be loveless at the best of times because of differences over a host of issues related to developments in the region.

The Saudi regime does not command much respect among Erdogan’s Islamist support base either, especially since Crown Prince Mohammed bin Salman effectively took control of power and started underlining the importance of moderate Islam.

The term “moderate Islam” is seen by Turkish Islamists as a Western invention designed to control governments in predominantly Islamic countries.

The Saudi regime is also widely accused in Turkey of playing a duplicitous role in the Middle East that serves US and Israeli interests more than those of the Islamic world.

Turkey’s support for the Muslim Brotherhood and its offshoots like Hamas — which are considered by Saudi Arabia as radical organizations that pose an existential threat — is a principal issue that Ankara and Riyadh are at odds over.

The backing that Riyadh gave to the Egyptian military in 2013 when it toppled the country’s elected President Mohammed Morsi and his Islamic Brotherhood-led government still rankles Ankara.

Turkey’s support for Qatar, in defiance of Saudi-led efforts to isolate and punish the Gulf state for its support of the Muslim Brotherhood and its good ties with Iran, is another contentious issue between Ankara and Riyadh.

Despite these clouds over the relationship, diplomatic pragmatism has forced the sides to maintain a veneer of friendly ties. This, however, may be hard to preserve now as facts pertaining to Khashoggi’s disappearance begin to emerge.

The fact that Khashoggi had good personal relationships with prominent names from Erdogan’s Justice and Development Party (AKP) and strong links to the pro-government media in Turkey will also pressurize Erdogan into acting firmly against Riyadh.

In his initial statement on the affair over the weekend, Erdogan also characterized Khashoggi as “a friend of long standing.” He will, therefore, want to avoid any impression that he is prepared to whitewash an affair involving the disappearance of a respected international journalist who also happens to be close to prominent names within his own party.

Yasin Aktay, a columnist for the Islamist daily Yeni Safak and personal adviser to Erdogan — Aktay blew the whistle on Khashoggi’s disappearance — is one such name. Aktay was contacted by Hatice Cengiz, Khashoggi’s Turkish fiance, as she was told to do by Khashoggi if he should not reemerge from the consulate after entering it on Oct 2.

Meanwhile, well-known names from the Middle East such as Tawakkol Abdel-Salam Karman, the Yemeni journalist, politician and human rights activist who was awarded the 2011 Nobel Peace Prize, are among those keeping vigil outside the Saudi Consulate in Istanbul and calling for Riyadh to be held accountable.

Hakan Albayrak writes for the newspaper Karar, whose audience is the more liberal wing of AKP supporters. He argues that Turkey can’t afford to take this affair lightly.

“If the strongest reaction is not shown in response to what was done to Jamal Khashoggi in Turkey, then Saudi Arabia and other states will be encouraged to carry out these operations in Turkey,” Albayrak wrote.

Yahya Bostan, from the pro-government Daily Sabah, also reflected the groundswell of anger against Saudi Arabia.

“If Saudi Arabia had a journalist and dissident murdered at a diplomatic mission in a foreign country, it deserves to be designated a rogue state more than any other nation in the world,” Bostan wrote.

“If Jamal Khashoggi has indeed been killed at the Saudi Consulate in Istanbul, there will be legal, political and diplomatic consequences,” he added.

Aktay is also among those demanding strong action against Riyadh. “When we ask [consulate officials], they say [Khashoggi] left [the consulate] even though we have established that he did not,” Aktay told the daily Hurriyet in an interview.

“This suggests they do not take Turkey seriously. … This is a matter of honor for Turkey now. Being overly sensitive about our ties with Saudi Arabia is a luxury at this stage” he added.

Erdogan told reporters on Oct. 8, during a press conference in Budapest with Hungarian Prime Minister Victor Orban, that it was “Turkey’s political and humane duty” to follow this affair closely with all the means available to it.

“Consulate officials cannot exonerate themselves by simply saying [Khashoggi] left the premises. If he did, then they have to prove this with visual material,” Erdogan said.

According to various press accounts based on information from unnamed Turkish officials, the operation against Khashoggi was carried out by Saudi agents numbering somewhere between 12 and 15, who arrived hastily in Istanbul on two private jets just prior to Khashoggi’s fateful appointment at the consulate and left equally as hastily shortly after it.

This group is suspected of having carried out the operation against Khashoggi.

Turan Kislakci, who heads the Turkish-Arab Media Association, provided a chilling account for reporters on what happened to Khashoggi, which he said was based on information provided by security officials.

“After he entered the consulate, he was anesthetized and [then] his body was cut into 15 pieces and distributed among 15 people,” Kislakci told reporters. This claim has not been officially corroborated yet.

The Saudi consulate denies these allegations and has maintained over its Twitter account that Khashoggi left the consulate after completing his business there.

In an interview with Bloomberg on Oct. 5, Prince Mohammed also denied the allegations against his country and said they would allow the Turkish government to search the consulate. “We have nothing to hide,” he said.

Ankara has applied to do so, but many commentators believe the permission by the Saudi side is farcical since there has been plenty of time to rid the premises of evidence. It is not clear either if the Saudi permission will cover a detailed search by police experts for forensic evidence.

Ankara is clearly angry that the Saudi regime selected Turkey to carry out an operation such as this, fully aware that this was bound to leave Turkey in a difficult position domestically and internationally.

Many also question how Saudi officials believed they would get away with this operation without being noticed. They indicate that this either reflects a lack of intelligence or a lack of respect for Turkey.

Nagehan Alci, a pro-government columnist for HaberTurk, wrote that Prince Mohammed is known for brutally arresting and destroying his opponents. She speculated in her column as to why Salman had opted to kill Khashoggi in this way, even though it was clear that this would anger not just Turkey but also the United States.

“This was done to spread fear among his enemies by showing them that he will annihilate his opponents regardless of whether they live in the United States or write for the Western media,” Alci argued, referring to the fact that Khashoggi was living in self-exile in America and wrote a column for The Washington Post.

“Saudi Arabia means oil for the world. With the self-confidence that this gives, and relying on the attraction of the dividends that Aramco shares will secure, [Prince Mohammed] must have thought that Khashoggi’s death would not give him much of a headache,” Alci reasoned.

If that is the case, it may turn out to be a gross mistake on the part of Prince Mohammed because Ankara has been left in a situation that it can’t afford to take lightly.

Diplomatic observers expect Turkey to recall its ambassador in Riyadh and expel the Saudi Consul General in Istanbul in the coming days, depending on how this affair pans out. The potential for this to turn into a full-blown crisis between the two countries also remains on the cards.

Meanwhile, Khashoggi's Turkish friends seem determined to see that this matter is not swept under the carpet for the sake of diplomatic expediency.

 

One of the Qatari construction companies isn’t paying its workers. And workers just can’t up and leave, or move to another employers, according to the article below.

When I arrived in Dubai, in the UAE, the weekend was still only a day and a half (half of Friday and Saturday) although journalists seldom got Friday off (or I didn’t anyway). And if you wanted to leave an employer that was in Dubai proper- ie not in a free zone- you needed to ask the permission of your employer. Employers also retained employees’ passports.

This was the same in Qatar. A lot of people were not allowed to move to another employee.  And I’ve heard of other people and companies not being paid. Therefore, I was not surprised to read this article in The Daily Mail.

 

 Amnesty International says Qatar isn't paying World Cup stadium workers, with hundreds owed up to £4,000

  • Workers on stadiums for the Qatar 2022 World Cup are reportedly without pay 
  • Amnesty has investigated 78 cases, and many more could be owed up to £4,000
  • The 'future city' of Lusail will eventually become home to 260,000 people 

By Ian Herbert For The Daily Mail

Published: 22:38, 25 September 2018 | Updated: 09:43, 26 September 2018

Hundreds of impoverished workers at the venue which will host Qatar's 2022 World Cup final have gone unpaid for months and are owed up to £4,000, a damning Amnesty International report reveals on Wednesday.

The Qataris boast that the so-called 'future city' of Lusail will include parks, marinas and a theme park as well as the 80,000 stadium — and will eventually be home to 260,000 people.

But behind the £34 billion development's public relations gloss, Amnesty has discovered that at least 78 workers from India, Nepal and the Philippines have been struggling to feed themselves after going unpaid. 

Amnesty International says hundreds of workers on Qatar 2022 stadiums are not getting paid

The stadium project is being financed by a subsidiary of the Qatari Diar Real Estate Investment Company — part of Qatar's rich sovereign wealth fund. Yet engineering contractor Mercury MENA told the human rights organisation that it has cashflow problems and was unable to pay the workers, who were stranded in the Street 3 camp in the industrial area of Qatar's capital city Doha.

Many of those affected were told there was no money at precisely the same time, last October, that Qatar was announcing it would embark on a series of landmark reforms that could improve the country's desperately poor record on workers' rights.

One worker, who was too fearful to be identified, told Amnesty that he gave up any hope of being paid, four months after travelling from the Philippines to Qatar. But the company forced him to stay and work and allegedly failed to provide him with residency papers, which are a legal requirement in Qatar. The worker told Amnesty that he found work elsewhere in Qatar but was told he must 'renounce any claim to his unpaid wages' in order to take it.

Amnesty has investigated 78 cases, and many more could be owed sums going up to £4,000

He decided to do so but was unable to take the job because he had £400 in outstanding fines imposed on him for not having the residency permit.

He eventually secured a return home last November.

'He left still being owed four months' wages and in greater debt than when he arrived,' reported Amnesty.

A Nepalese worker, who had gone unpaid, said he had been given permission to leave Qatar but was told he would not receive the salary owed.

He remained at the Street 3 camp in the hope of being paid. In November 2017, he borrowed money from his family to book a flight home and left Qatar, despite being owed £1,800.

Amnesty said it had investigated the cases of 78 workers from India, Nepal and the Philippines who faced the same problems and there is evidence that 143 workers in the Street 3 camp alone have not been paid.

Most of the workers whose cases Amnesty investigated are owed between £1,000 and £1,880.

Qatar’s Ministry of Administrative Development, Labour and Social Affairs said the failure to pay workers lay at the door of the company who had employed them, which would now be investigated.

The ministry said in a statement: "The concerns highlighted by Amnesty International are not tolerated by the State of Qatar. Currently there are legal proceeding underway concerning Mercury MENA. While Mercury MENA no longer operates in Qatar, legal matters will continue and we will conduct a full investigation. We will address any existing issues or violations and remedy any remaining matters. "

There are many Filipinas/os in the Middle East, most of whom are looking for good employment opportunities so that they can send money back home- often to send their children to work. It’s a sad situation. Even more so, when we learn that the mother is forced into prostitution and documents taken away.

 I spotted this on the website of Khaleej Times, a national newspaper in the UAE.

 Filipina expat forced to work as prostitute in Arab country

Filed on September 19, 2018 | Last updated on September 19, 2018 at 05.58 pm

 

She returned to the Philippines following her escape from her employer last week.

Cecile Tubadan, a 32-year-old mother from Leon Postigo town, was elated when an opportunity to work in Lebanon presented itself. 

The recruiter, a sister of her live-in partner, seemed trustworthy that she did not hesitate to fly to Lebanon to work as a housemaid on a tourist visa.

It was too late when she learned she was deceived.

Tubadan narrated her ordeal to the Philippine News Agency on Monday, four days after she returned to the country following her escape from an employer - who physically abused her when she refused to work as a prostitute.

"I agreed because I'm jobless, I have four children, and I cannot rely on the money sent by my partner," Tubadan said.

She said it was her live-in partner's sister, Myrene Salvador Abuan,  who enticed her to work in Lebanon for $400 a month. 

Abuan is married to Syrian Hashim Ali, who endorsed her to SREIH Services, a housemaid agency in Lebanon, which paid the couple $800 for bringing in the unsuspecting Tubadan.

Tubadan said her focus was on earning money for her family that she did not mind going to Lebanon on July 19, 2018, supposedly as an overseas contract worker.

"I have no contract, no work documents--nothing, but I still went to Lebanon because I trusted Myrene," Tubadan said.

She was told to work at the house of the Alis until they can find her an employer. But then everything changed, Tubadan said, when Ali told her to work as a prostitute disguised as masseuse at a spa.

Tubadan claimed that Ali beat her and barred her from going out of their apartment building when she refused.

After several weeks, Tubadan recalled she posted on Facebook an appeal for her rescue, which was seen by her relatives and a neighbor in Leon Postigo, William Anadeo, a school teacher in their town.

Anadeo sought the help of first district Rep. Seth Frederick Jalosjos, who immediately sent a letter to the Department of Foreign Affairs (DFA), which promptly ordered its embassy in Lebanon to find Tubadan.

Meanwhile, Tubadan said she got the chance to escape on September 11 when Hashim Ali was not at home.

She asked permission from Myrene Salvador Abuan to go to the prayer meeting of fellow Filipinos at an apartment at the ground floor.

With the help of friends, she was slipped out of the building and brought to a coffee shop where she was fetched by a relative and brought to the Philippine Embassy.

According to Tubadan, embassy officials demanded SREIH Services to return her travel documents and give her plane ticket back home or they would bring her case to the Lebanese government.

The owners of SREIGH Services agreed, but also had Tubadan sign a document stating that she would not file a case against the agency.

On September 13, Tubadan was able to fly back to Manila.

Upon arriving in Dipolog, she immediately went to thank Jalosjos, and to ask the lawmaker to help three other distressed Filipinas at the apartment of Hashim Ali.

"There are a lot of Filipinas who need help," she said, "there were about a hundred at the embassy. They could not come home because they still have legal cases or they have no money."

In most cases, Tubadan said that victims of illegal recruitment and human trafficking in Lebanon were recruited by either friends or relatives. 

Press Release: 24 September 2018- Christchurch, New Zealand

 Failure to speak English is the main barrier refugees face when looking for employment and accessing healthcare.

 Other barriers to finding employment include discrimination- ethnic and gender- a lack of local work experience and a failure by employers to recognise qualifications gained outside New Zealand.

 These are discussed further in a study carried out by the Canterbury Refugee Resettlement and Resource Centre (CRRRC). This study gathered information on the challenges refugees face when seeking employment, the quality of that employment, the state of refugee health and the ability of refugees to access health services.

 The information was elicited from refugees themselves via a questionnaire. “Although the survey was conducted among refugees in Christchurch and its surrounds, the answers can be extrapolated to the rest of New Zealand,” one of the co-researchers, Sumaiya Nasir, general manager of the CRRRC said.

 She also commented: “Forty- seven per cent of the respondents, all of whom were underemployed or unemployed, said that the lack of local work experience is a major barrier to finding employment”.

 Language was also a key challenge for refugees accessing healthcare. There is a lack of interpreter services particularly for specific languages, such as Dari and Amharic, and often there is a need for different interpreters for the same language because of a difference in dialect, the findings show.

 What the research into healthcare also confirmed is that refugees are a vulnerable group who tend to have complex health needs which often become more acute after third-country resettlement

 All participants said the cost of primary healthcare was fundamental, with almost everyone identifying the cost of a GP as extremely important.

 About 17 per cent of participants felt discrimination was the main issue they faced when accessing healthcare services, the findings show.

 When participants were asked if they have ever accessed mental health services, 90 per cent said they had never used them for either themselves or any family members

 The CRRRC makes several recommendations in its report, Nasir says. These are outlined below:

 -There should be greater provision for providing language classes to all refugee-background people regardless of their immigration status.

 -Facilities for culturally responsive childcare and education are needed. Women can then attend English for Speakers of other Languages (ESOL) classes.

 -Employers need to understand more about refugee-background professionals and, in some cases, recognise overseas qualifications.

-There should be individualised employment programmes to incorporate critical components that enable people from refugee backgrounds to secure meaningful employment

 - Resources need to be shifted from disease focused, and other traditional hospital services, to the primary level and strong health promotion programmes need to be created that emphasise prevention and self-care in a cultural competent way.

- More effort needs to be made to shorten the time to process residency claims. Delaying the waiting time leads to more stress for refugees.

- There needs to be greater access to trained interpreters.

To obtain the full report on the CRRRC survey and/or for more information on the findings please contact:

 Sumaiya Nasir

General manager

CRRRC

Telephone: (03) 377 2538

Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

 

or Lucia Dore

Co-researcher and media consultant

Lucia Dore Consultancy

027 7551170 (from 3 October).

This email address is being protected from spambots. You need JavaScript enabled to view it.

There’s been a great deal in the media recently, the radio, the television and newspapers, about the financial crisis of 2008-2009- since it’s 10 years since the demise of Lehman Brothers, the investment bank.

I was in Dubai at the time, and suddenly our pay was cut somewhere between £2000-£3000 a month. It was then denominated in pound sterling rather than UAE dirhams, even though we had never agreed to the change. That seems to be the way companies are nowadays- domineering and bullying. Employees are only seen as a cost.

At the same time, the financial crisis coincided with the property crisis in Dubai- too much property and not enough investors. Blame the financial crisis, not government policy.

Here’s an article by Ben Bernanke, former chairman of the Federal Reserve, published by the Brookings Institute.

At the height of the financial crisis a decade ago, economists and policymakers underestimated the depth and severity of the recession that would follow. I argue in a paper released today by the Brookings Papers on Economic Activity (BPEA) that remedying this failure demands a more thorough inclusion of credit-market factors in models and forecasts of the economy. I also provide new evidence that suggests that the severity of the Great Recession reflected in large part the adverse effects of the financial panic on the supply of credit.  In particular, the housing bust alone can’t explain why the Great Recession was as bad as it was.

Economists have described two primary channels through which the financial crisis of a decade ago depressed economic activity: (1) a build up in household debt in the early 2000s which, in combination with the collapse of housing prices, dampened household spending; and (2) fragilities in the financial system, including excessive risk-taking and reliance on short-term wholesale funding, which resulted in a panic and credit crunch. The two channels overlap, but the relative importance of each to the real economy has implications for financial regulation and for policymakers’ response to future crises.

The starting point for understanding both channels, and the role of credit-market factors in macroeconomics more generally, is the recognition that there is a cost associated with connecting lenders to creditworthy borrowers. Lenders have less-than-perfect information about potential borrowers and so must bear the costs of screening and evaluating them, and of monitoring them after making the loan.  These costs add up to an external finance premium, the difference between the all-in cost of funding a risky private borrower and the cost of lending to a perfectly safe borrower like the U.S. government.  In general, the size of the external finance premium depends on the financial health of both borrowers and lenders. For example, a borrower with good collateral and a sizable down payment is cheap to lend to, being very likely to repay, while a bank with a large capital cushion can attract the funding it needs at lower cost.  By the same token, declines in the aggregate financial health of borrowers or lenders increase the cost of extending credit, dampen investment and consumption, and slow the economy.  For both channels—one related to the health of household balance sheets, the other to disruptions in credit intermediation—the key to understanding their real effects lies in tracing their impacts on the cost and availability of credit.

Recent work, including by Atif Mian and Amir Sufi, proposes that the accumulation of debt during the housing boom of the early 2000s made households particularly vulnerable to changes in their net worth. When house prices began to decline, homeowners’ main source of collateral (home equity) contracted, reducing their access to new credit even as their wealth and incomes declined.  These credit constraints exacerbated the declines in consumer spending.  In effect, the external finance premium faced by households rose sharply. Mian and Sufi and others attribute the economic downturn in 2008 and 2009 primarily to the boom and subsequent bust in housing wealth, together with the associated deleveraging and spending reductions by households. This narrative captures the important relationship between borrower balance sheets and the real economy while de-emphasizing the turmoil in financial markets that grabbed the most headlines.

The second channel through which the crisis led to a recession was a severe financial panic – a system-wide run on providers of credit, including banks but also, importantly, nonbank lenders like investment banks and finance companies. In normal times, banks and other intermediaries make loans and hold most of the credit risk on their balance sheets. Providers of credit finance their lending by issuing safe, mostly short-term liabilities, including not only old-school demand deposits (in the case of banks) but also so-called wholesale forms of funding, such as commercial paper and repurchase agreements (or “repos”), which are a form of short-term, collateralized loans.  Before the crisis, investors were happy to provide wholesale funding, even though it was not government insured, because such assets were liquid and perceived to be quite safe.  Banks and other intermediaries liked the low cost of wholesale funding and the fact that it appealed to a wide class of (mostly institutional) investors.  Credit intermediaries’ reliance on wholesale funding grew rapidly in the years leading up to the crisis.

Panics emerge when news leads investors to believe that the “safe” short-term assets they have been holding may not, in fact, be entirely safe. If the news is bad enough, investors will pull back from funding banks and other intermediaries, refusing to roll over their short-term liabilities as they mature. As intermediaries lose funding, they may be forced to sell existing loans and to stop making new ones, driving up the external finance premium. The cost of financing any project—buying a house or car or making a business investment—will spike, slowing the economy.

Panic-type phenomena occurred in a variety of contexts after a series of revelations about the riskiness of subprime mortgage-related assets in the summer of 2007. One problem was that dicey subprime mortgages had been combined with other types of credit in complicated securities, so that investors lost confidence not only in subprime but in almost all types of securities backed by private credit.  Runs occurred on a variety of forms of financing, including asset-backed commercial paper, structured investment vehicles and other conduits, securities lending, and money market funds. The repo market, which was critical for the daily financing operations of many intermediaries, especially investment banks, was hit particularly hard. Eventually, runs and the contraction in funding generated broad selloffs on numerous other securities unrelated to the housing market, like corporate bonds and securities backed by student loans and credit cards. This spread of the panic to non-mortgage credit caused the external finance premium to spike for both households and firms, with potentially severe effects on the real economy (see Gertler and Kiyotaki, 2015).

Prior to the crisis, the macroeconomic models used by central banks and forecasters—including the Fed’s workhorse model—provided little guidance on how to think about the economic effects of credit-market disruptions. Fed staff and policymakers accordingly under-predicted the depth and duration of the recession.  For example, in October 2008, when the financial panic was at its most intense, the Fed staff predicted that unemployment would peak at a little above 7 percent; in reality, it would reach 10 percent by the fall of 2009.  Other forecasters also underestimated the impact of the crisis.  As I discuss in my paper, the crisis significantly changed economists’ views on the importance of credit factors in the economy at large, and during the past decade, much interesting new research has documented the importance of those factors and shown how to incorporate them into macroeconomic forecasting and analysis.  But there is still much progress to be made.

New Evidence

A principal goal of my paper is to study the relative importance of the two potential channels by which the crisis affected the economy: the channel working through household balance sheets and the channel related to the financial panic.  There are four stages of the crisis: the collapse of investor confidence in subprime mortgages, the beginning of broad-based pressures in funding markets, panic and fire sales in the markets for securitized credit (including non-mortgage credit), and the deterioration in the balance sheets of banks and other lenders.

Investors’ develop concerns about the housing market and mortgage-related assets.  In this first stage of the crisis, these concerns grew as house prices declined and mortgage delinquencies rose beginning in early 2007.

In August 2007, after France’s largest investment bank, BNP Paribas, announced it was unable to value the assets in three of its largest investment funds, funding stress reached its peak. Following the Lehman Brothers bankruptcy in September 2008, funding stress came down by the end of the year as various government programs took effect.

The third stage of the crisis reflects the indiscriminate spread of the panic from mortgage to non-mortgage assets. Funding strains and a general loss of confidence in securities backed by private credit forced investment banks and other lenders to sell large quantities of risky assets, often at fire sale prices.

The final series indicates the deteriorating balance sheets of large commercial and investment banks caused by mortgage losses, funding pressures, and fire sales. In the fourth stage of the crisis, bank health worsened steadily through early 2009 (higher values imply a higher risk of default), improved following regulators’ stress tests of large banks that spring, and worsened again at about the time of the credit downgrade of the U.S. government in 2011 and continuing pressures in Europe.

While these individual data series nicely illustrate the stages of the financial crisis, they are only individual series. How do we know that they are representative? In the analysis of my paper, I use a large set of daily financial data to construct four summary variables, which contain, respectively, information about housing and mortgage markets, short-term wholesale funding, non-mortgage credit, and the balance sheets of banks and other lenders.  These summary variables, or “factors,” it turns out, correspond closely to the four stages of the crisis, showing that the basic story is robust.  Having estimated the factors, I then use them to ask an important question: What would have happened to GDP and other measures of real economic activity if the housing and mortgage bubble had burst but funding and securities markets had remained reasonably stable?  Would the recession have been as deep?

For convenience, I group the four estimated factors into two sets:  First, I combine the two factors that reflect the pressures on short-term funding and the fire sales in non-mortgage credit markets and call them “Panic Factors.”  These two factors correspond closely to the financial panic that began in the summer of 2007 but became much more intense after the failure of Lehman Brothers and the government rescue of AIG.  Second, I combine the factors describing the bust in housing and mortgage markets and the weakening of the balance sheets of banks and other lenders, calling them “Balance Sheet Factors.”  The balance sheet factors include the household balance sheet channel described by Mian and Sufi as well as the effects of mortgage losses on lender capital positions. (Excluding the bank solvency factor, leaving only the factor describing housing and mortgage markets, does not change the results.) I then ask how well the two sets of factors predict changes in GDP, industrial production, housing starts, employment, consumption, and other indicators of real activity.

The Panic Factors on their own (that is, abstracting from the declines in housing) consistently predict the steep declines in economic growth and other real variables that marked the early stages of the Great Recession, while the Balance Sheet Factors on their own do not predict the downturn.  These results indicate that the severity of the recession cannot be explained by a deterioration in housing and consumer finances alone, but in large part reflected the widespread run on short-term funding and securitized credit. They also suggest that policymakers’ aggressive actions to end the financial panic on Wall Street were crucial in preventing an even more devastating blow to Main Street.

The starting point for understanding both channels, and the role of credit-market factors in macroeconomics more generally, is the recognition that there is a cost associated with connecting lenders to creditworthy borrowers. Lenders have less-than-perfect information about potential borrowers and so must bear the costs of screening and evaluating them, and of monitoring them after making the loan.  These costs add up to an external finance premium, the difference between the all-in cost of funding a risky private borrower and the cost of lending to a perfectly safe borrower like the U.S. government.  In general, the size of the external finance premium depends on the financial health of both borrowers and lenders. For example, a borrower with good collateral and a sizable down payment is cheap to lend to, being very likely to repay, while a bank with a large capital cushion can attract the funding it needs at lower cost.  By the same token, declines in the aggregate financial health of borrowers or lenders increase the cost of extending credit, dampen investment and consumption, and slow the economy.  For both channels—one related to the health of household balance sheets, the other to disruptions in credit intermediation—the key to understanding their real effects lies in tracing their impacts on the cost and availability of credit.

Panics emerge when news leads investors to believe that the “safe” short-term assets they have been holding may not, in fact, be entirely safe. If the news is bad enough, investors will pull back from funding banks and other intermediaries, refusing to roll over their short-term liabilities as they mature. As intermediaries lose funding, they may be forced to sell existing loans and to stop making new ones, driving up the external finance premium. The cost of financing any project—buying a house or car or making a business investment—will spike, slowing the economy.

Panic-type phenomena occurred in a variety of contexts after a series of revelations about the riskiness of subprime mortgage-related assets in the summer of 2007. One problem was that dicey subprime mortgages had been combined with other types of credit in complicated securities, so that investors lost confidence not only in subprime but in almost all types of securities backed by private credit.  Runs occurred on a variety of forms of financing, including asset-backed commercial paper, structured investment vehicles and other conduits, securities lending, and money market funds. The repo market, which was critical for the daily financing operations of many intermediaries, especially investment banks, was hit particularly hard. Eventually, runs and the contraction in funding generated broad selloffs on numerous other securities unrelated to the housing market, like corporate bonds and securities backed by student loans and credit cards. This spread of the panic to non-mortgage credit caused the external finance premium to spike for both households and firms, with potentially severe effects on the real economy (see Gertler and Kiyotaki, 2015).

Prior to the crisis, the macroeconomic models used by central banks and forecasters—including the Fed’s workhorse model—provided little guidance on how to think about the economic effects of credit-market disruptions. Fed staff and policymakers accordingly under-predicted the depth and duration of the recession.  For example, in October 2008, when the financial panic was at its most intense, the Fed staff predicted that unemployment would peak at a little above 7 percent; in reality, it would reach 10 percent by the fall of 2009.  Other forecasters also underestimated the impact of the crisis.  As I discuss in my paper, the crisis significantly changed economists’ views on the importance of credit factors in the economy at large, and during the past decade, much interesting new research has documented the importance of those factors and shown how to incorporate them into macroeconomic forecasting and analysis.  But there is still much progress to be made.

New Evidence

A principal goal of my paper is to study the relative importance of the two potential channels by which the crisis affected the economy: the channel working through household balance sheets and the channel related to the financial panic.  There are  four stages of the crisis: the collapse of investor confidence in subprime mortgages, the beginning of broad-based pressures in funding markets, panic and fire sales in the markets for securitized credit (including non-mortgage credit), and the deterioration in the balance sheets of banks and other lenders.

Investors’ developed concerns about the housing market and mortgage-related assets.  In this first stage of the crisis, these concerns grew as house prices declined and mortgage delinquencies rose beginning in early 2007.

“Funding,” is a measure of stress in the short-term funding markets that banks use to finance their daily operations. The series rose (showing greater stress) in August 2007, after France’s largest investment bank, BNP Paribas, announced it was unable to value the assets in three of its largest investment funds, kicking off the second stage.  Funding stress reached its peak following the Lehman Brothers bankruptcy in September 2008 but came down by the end of the year as various government programs took effect.

The third stage of the crisis, shown by  “Nonmortgage Credit,” reflects the indiscriminate spread of the panic from mortgage to non-mortgage assets. Funding strains and a general loss of confidence in securities backed by private credit forced investment banks and other lenders to sell large quantities of risky assets, often at fire sale prices.

The final series, labeled as ‘Bank Solvency’ indicates the deteriorating balance sheets of large commercial and investment banks caused by mortgage losses, funding pressures, and fire sales. As this variable shows, in the fourth stage of the crisis, bank health worsened steadily through early 2009 (higher values imply a higher risk of default), improved following regulators’ stress tests of large banks that spring, and worsened again at about the time of the credit downgrade of the U.S. government in 2011 and continuing pressures in Europe.

While these individual data series nicely illustrate the stages of the financial crisis, they are only individual series. How do we know that they are representative? In the analysis of my paper, I use a large set of daily financial data to construct four summary variables, which contain, respectively, information about housing and mortgage markets, short-term wholesale funding, non-mortgage credit, and the balance sheets of banks and other lenders.  These summary variables, or “factors,” it turns out, correspond closely to the four stages of the crisis, showing that the basic story is robust.  Having estimated the factors, I then use them to ask an important question: What would have happened to GDP and other measures of real economic activity if the housing and mortgage bubble had burst but funding and securities markets had remained reasonably stable?  Would the recession have been as deep?

For convenience, I group the four estimated factors into two sets:  First, I combine the two factors that reflect the pressures on short-term funding and the fire sales in non-mortgage credit markets and call them “Panic Factors.”  These two factors correspond closely to the financial panic that began in the summer of 2007 but became much more intense after the failure of Lehman Brothers and the government rescue of AIG.  Second, I combine the factors describing the bust in housing and mortgage markets and the weakening of the balance sheets of banks and other lenders, calling them “Balance Sheet Factors.”  The balance sheet factors include the household balance sheet channel described by Mian and Sufi as well as the effects of mortgage losses on lender capital positions. (Excluding the bank solvency factor, leaving only the factor describing housing and mortgage markets, does not change the results.) I then ask how well the two sets of factors predict changes in GDP, industrial production, housing starts, employment, consumption, and other indicators of real activity.

The Panic Factors on their own (that is, abstracting from the declines in housing) consistently predict the steep declines in economic growth and other real variables that marked the early stages of the Great Recession, while the Balance Sheet Factors on their own do not predict the downturn.  These results indicate that the severity of the recession cannot be explained by a deterioration in housing and consumer finances alone, but in large part reflected the widespread run on short-term funding and securitized credit. They also suggest that policymakers’ aggressive actions to end the financial panic on Wall Street were crucial in preventing an even more devastating blow to Main Street.

Panics emerge when news leads investors to believe that the “safe” short-term assets they have been holding may not, in fact, be entirely safe. If the news is bad enough, investors will pull back from funding banks and other intermediaries, refusing to roll over their short-term liabilities as they mature. As intermediaries lose funding, they may be forced to sell existing loans and to stop making new ones, driving up the external finance premium. The cost of financing any project—buying a house or car or making a business investment—will spike, slowing the economy.

Panic-type phenomena occurred in a variety of contexts after a series of revelations about the riskiness of subprime mortgage-related assets in the summer of 2007. One problem was that dicey subprime mortgages had been combined with other types of credit in complicated securities, so that investors lost confidence not only in subprime but in almost all types of securities backed by private credit.  Runs occurred on a variety of forms of financing, including asset-backed commercial paper, structured investment vehicles and other conduits, securities lending, and money market funds. The repo market, which was critical for the daily financing operations of many intermediaries, especially investment banks, was hit particularly hard. Eventually, runs and the contraction in funding generated broad selloffs on numerous other securities unrelated to the housing market, like corporate bonds and securities backed by student loans and credit cards. This spread of the panic to non-mortgage credit caused the external finance premium to spike for both households and firms, with potentially severe effects on the real economy (see Gertler and Kiyotaki, 2015).

Prior to the crisis, the macroeconomic models used by central banks and forecasters—including the Fed’s workhorse model—provided little guidance on how to think about the economic effects of credit-market disruptions. Fed staff and policymakers accordingly under-predicted the depth and duration of the recession.  For example, in October 2008, when the financial panic was at its most intense, the Fed staff predicted that unemployment would peak at a little above 7 percent; in reality, it would reach 10 percent by the fall of 2009.  Other forecasters also underestimated the impact of the crisis.  As I discuss in my paper, the crisis significantly changed economists’ views on the importance of credit factors in the economy at large, and during the past decade, much interesting new research has documented the importance of those factors and shown how to incorporate them into macroeconomic forecasting and analysis.  But there is still much progress to be made.

New Evidence

A principal goal of my paper is to study the relative importance of the two potential channels by which the crisis affected the economy: the channel working through household balance sheets and the channel related to the financial panic.  To study the relative importance of the two, I turn to an illustration of the different stages of the financial crisis. The chart below shows some representative financial data, which in turn illustrate four stages of the crisis: the collapse of investor confidence in subprime mortgages, the beginning of broad-based pressures in funding markets, panic and fire sales in the markets for securitized credit (including non-mortgage credit), and the deterioration in the balance sheets of banks and other lenders.

Stages of the Financial Crisis

Although the Balance Sheet factors do not forecast the acute phase of the economic downturn in my setup, that does not mean they were irrelevant. Of course, the bursting of the housing bubble was the spark that ignited the panic in the first place. Moreover, much other evidence (by Mian and Sufi and others) is consistent with the view that household deleveraging contributed both to the initial downturn in spending and to the slowness of the recovery. It may well be that household balance sheets evolve too slowly and smoothly for their effects to be fully accounted for in the type of analysis used in my paper, which tends to emphasize shorter-term fluctuations. But my results do suggest that, in the absence of the panic, the declines in employment, consumption and output in the early stages of the Great Recession would have been significantly less severe.

The panic of 2008 differed from the Great Depression of the 1930s in that the runs on the financial system during the recent episode were on wholesale funding, and occurred electronically, while in the 1930s retail depositors lined up in the streets.  But the overall effect was the same:  A loss of confidence in credit providers caused the supply of credit to plummet, the external finance premium to spike, and the real economy to contract rapidly.  Macroeconomic analysis and forecasting needs to take into account how disruptions to credit markets, in ordinary recessions as well as in financial panics, can damage the real economy.

*Sage Belz and Michael Ng contributed to this post. For a full post please go to https://www.brookings.edu/blog/ben-bernanke/2018/09/13/financial-panic-and-credit-disruptions-in-the-2007-09-crisis/

Ben S. Bernanke is a Distinguished Fellow in Residence with the Economic Studies Program at the Brookings Institution. From February 2006 through January 2014, he was Chairman of the Board of Governors of the Federal Reserve System. Bernanke also served as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body.