Tim Yeager Discusses The Federal Reserve and the Housing and Credit Crises


Short Talks From The Hill” is a new podcast highlighting research and scholarly work across the University of Arkansas campus. Each segment features a university researcher discussing his or her work. In this episode, the first in a two-part series, Tim Yeager, professor of Finance in the Sam M. Walton College of Business, discusses the Federal Reserve, where he worked for many years, and the housing and credit crises.

Tim Yeager

Matt McGowan: Hello, and welcome to Short Talks From The Hill, a new podcast from the University of Arkansas. My name is Matt McGowan. In this episode, the first in a 2-part series, Tim Yeager, professor of Finance in the Sam M. Walton College of Business, discusses the Federal Reserve, where he worked for many years, and the housing and credit crises.You worked at the Federal Reserve Bank at St. Louis for about 8 years. What was your title there and what did you do?

Tim Yeager: When I first started at the St. Louis Federal Reserve I was an economist and a couple years back a new research and policy group in the bank’s supervision unit was just founded.  After the savings and loan crisis and a number of community bank failures in the late 80s and early 1990s the supervision community realized that they needed a little more statistical horsepower.  So I was brought in essentially as a member of that team. Through the years there I worked on research, I worked on; mostly regarding community banks.  I worked on policy analysis and we looked at various proposals to change regulation.  We looked at the health of the banking sector.  And again through the years I was promoted to various positions and when I left the Fed I was running that group as an assistant vice-president.

MM: At the University of Arkansas where you’ve been for more than ten years, you are an associate professor of finance and hold the Arkansas Bankers chair in banking.  Tell us about your teaching and research at the university in general and what are some of the responsibilities tied to the Arkansas Bankers chair?

TY: I was brought in to really specialize in the banking sector and to relate to the Arkansas bankers in particular.  I teach the undergraduate banking classes.  I teach the doctoral course in financial institutions and work closely with the graduate students on banking research.  I also supervise quite a few honors thesis and direct undergraduate students in their banking research.  And I do research and other types of activities that assist the bankers in the state.  One of the things that I do is give presentations fairly often to various groups.  So, I might have a banking group that wants me to talk about the Federal Reserve and monetary policy.  I might have a group that wants me to talk about the economy in general or the banking sector in general; or how the real estate markets are doing in the area and so on.  So I give those kinds of talks as well.  I also do research that tries to give community banks some tools that could help them in terms of their risk management.  That really relates back to my role at the Federal Reserve.  My focus has always been on risk management and my research in many ways has continued that focus.  So I’m trying to help banks understand their risks better and I’m trying to give them tools to help manage those risks.

MM: I’d like to talk about the recent financial crisis, which you were called upon to comment on as an expert.  In “The Big Short,” the film based on Michael Lewis’ book about the credit and housing crisis, several celebrities make cameo appearances to define concepts or attempt to explain facets of the crisis.  I found these cameos clever and informative but also insufficient in terms of really understanding what happened.  So I want you to pretend that you were one of the experts chosen for this movie.  How would you explain the effect of the housing and credit crisis on major U.S. banks?

TY: First of all let me say I’m a big fan of Michael Lewis’ books.  He has written books like “Moneyball” and “The Big Short” and so on and I’m always amazed how interesting he can make these sometimes  arcane or financial topics.  I think he did a really nice job in this movie as well with the director and actors doing a really nice job.  Basically what their premise of the financial crisis was is that it was a massive housing bubble that was allowed to form because nobody had responsibility to care about it forming or to take action to call out or to warn people that this is happening.  And one link along the chain to the next; nobody stood up and asked the big picture question like ‘why is this happening; why are home prices rising so quickly; why is it that banks are making such risky loans and nobody seems to care.’  He shows the picture of just a few of these investors who saw it coming and took big risks with a lot of money and were able to financially benefit from the downside of the housing crisis, which as the movie portrays, it didn’t necessarily leave them with a good feeling.  But what it does is bring out the misaligned incentives and there’s been a lot of research on these types of activities.  One is the so-called “originate to distribute” model of banking.  In that model banks originate loans and then they sell them very quickly.  If that’s the case you don’t have very strong incentive to make sure that the risk of those products is contained.  It’s as if you’re a car salesperson and you sell the car without any warranty and once it leaves the lot your job is done.  So you don’t care what the quality is of that product and that sort of mindset really channeled through the entire link, the entire financial system so that this massive risk was built up and the result that we see is the housing crisis.

MM: Music for Short Talks From The Hill was written and performed by Ben Harris, guitar Instructor at the University of Arkansas.  For more information and additional podcasts go to KUAF.com or ResearchFrontiers.uark.edu, the home of research news at the University of Arkansas.


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