An interesting analysis of the 2008 housing collapse.

The 2008 economic collapse gave us ten years of economic malaise and the presidency of Barack Obama.

Why did it happen ? I have been a fan of Nicole Gelinas’ book, “After the Fall”

I wrote a long review of it at Amazon, which is still a favorite of readers.

Now, we have a very interesting new analysis, which blames housing almost exclusively.

Looked at in terms of the popular narrative that there was a “financial crisis,” readers shouldn’t be fooled. There was nothing financial about what happened ten years ago. The “crisis” was made in Washington. Left alone, economies and markets never go haywire when natural market forces are putting out to pasture the weak, only to redirect the previously underutilized resources of the weak to higher uses.

He makes an interesting point, which tracks with my own observations.

a booming housing market of the kind experienced in the ‘70s and ‘00s is not a sign of economic vitality. Getting into specifics, a home purchase is not an investment. It won’t render the buyer more productive, open foreign markets for same, or morph into capital meant to develop something productivity-enhancing like software. Housing is consumption, that’s it. On the other hand, investment is what powers economic growth, so the very notion that a reorientation of precious capital away from consumptive goods and into production would foster economic crisis is for those who presume to comment on the economy to reveal how little they understand what they’re writing about. The feverish consumption of housing was what was holding the economy down, which means a reversal of what weighed on the economy would logically be good for growth. If so, markets would have discounted housing’s correction positively.

I moved to Orange County in 1972 to begin my medical practice. I already owned two homes in South Pasadena which I had difficulty selling after the move. There was no appreciation of housing. By 1975, when a bear market caused a malpractice insurance crisis for doctors, my 1972 house had tripled in value. The South Pasadena house I finally sold in 1972 for the same ($35,000) price I had paid for it in 1969, was by 1979 for sale for $595,000.

What did happen in both the 1970s and 2000s is that the dollar substantially declined vis-à-vis foreign currencies, commodities, and seemingly everything else. This matters because in both the ‘70s and ‘00s, gold, oil, wheat, land, rare stamps, art, housing, and just about every other kind of hard asset performed well. Well, of course. When money is losing value, the hard assets least vulnerable to currency devaluation perform best. In a repeat of the ‘70s, housing and other commodities proved a safe haven in the ‘00s from the U.S. Treasury’s policies in favor of a devalued dollar.

I remember well the rush to buy gold and antiques as hedges against the post 1974 inflation. An elderly woman in Oceanside California got wide publicity for her “crazy” decision to invest her money in buying four Rolls Royces and putting them in storage. She paid about $50,000 each. Five years later they were worth about $200,000 each.

Then came 2008.

It’s all a reminder that Lehman’s bankruptcy didn’t cause a “crisis” as much as the Bush administration’s foolish decision to bail out Bear Stearns months before created the perception in the marketplace that Lehman would be saved too. As such, investors weren’t prepared for the correct decision to let Lehman go. Put simply, Lehman was only earth-shaking insofar as prior government intervention turned what was healthy into a surprise. And having erred mightily in bailing out Bear, the Bush administration chose to make a bad situation much worse.

I remember well the debate in Congress about opposition to bailing out the banks. Congress was over ruled by Bush treasury Secretary, Henry Paulson, another Goldman Sachs product.

The bailout is still supported although the purpose was not explained truly.

But Congress didn’t want to reward bad banking decisions. The House of Representatives voted against it on September 29, 2008. The Dow fell 770 points and global markets plummeted.

To stem the panic, the U.S. Treasury Department agreed to insure money market funds for a year. The SEC banned short-selling financial stocks until October 2 to reduce volatility in the stock market.

On October 3, 2008, Congress approved a similar bill. President Bush signed the Emergency Economic Stabilization Act of 2008 into law within hours. The U.S. government promised to support the banks who bought bad mortgages. Without the bill, banks were afraid to lend to each other. Financial firms were unable to sell their debt.

That last is not true. There was a brief attempt to auction off bad assets to determine a value. Instead, Paulson bought them all at face value with taxpayer money.

Governments don’t mis-allocate the money of others only to walk away. They offer up the money of others only to demand a more muscular role in how the saved operate. Ok, but the 20th century was a monument to the failure of central planning. Is it any wonder that future-seeing investors looked negatively on a return of excessive government intervention in commerce?

What can’t be stressed enough about what happened in 2008 is that for economies to grow and markets to rise, it’s necessary that the mediocre and lousy constantly be replaced by the good and brilliant. The latter is a statement of the supremely obvious, but also a reminder of why markets tanked so substantially ten years ago. As opposed to allowing natural market forces to fix what was wrong, the Bush administration, Bernanke Fed and U.S. Congress chose to intervene in crony fashion on the way to reversing what was necessary for economic and market recovery.

That plus the consequences of 9/11 are what have given us the Leviathan Administrative State.

11 thoughts on “An interesting analysis of the 2008 housing collapse.”

  1. The government didn’t bail out Bear. They bailed out Bear’s creditors. Not the same thing. Then they briefly balked at bailing out Lehman’s creditors, before finally giving in. (Both cases can be interpreted as GS taking the opportunity to kill one of their competitors by refusing to back up a loan from a third party.) Creditors shouldn’t get bailed out when they give loans to other companies that they know darn well aren’t good to cover them.

    That week was such a farce. The Senate wasn’t going to vote on the plan for another week anyway. And then Treasury didn’t do anything like the proposed plan that was allegedly so vital to be shoved through Congress. I’m one of millions of people who was radicalized by the whole fiasco, against DC and the GOPe, leading inevitably to you-know-who.

  2. Another interesting take on the Administrative State.

    Wallison takes the originalist critique of the administrative state beyond merely questioning Chevron; he argues (in chapter 6) that the moribund “nondelegation doctrine” needs to be revived. This compelling analysis is the highlight of the book, a clear demonstration that resuscitating lost wisdom is just as important as trail-blazing scholarship. It is one thing to trim the sails of administrative agencies by making their interpretations (of both statutes and regulations) subject to meaningful judicial review. Article I of the Constitution expressly grants “all legislative powers” to the Congress. Therefore, the threshold question is whether it is constitutional for administrative agencies that are part of the executive branch to promulgate an extraordinary volume of regulations (numbering in the thousands each year) that represent major policy decisions and are the functional equivalent of legislation.

  3. Tamny ignores the role of the Community Reinvestment Act and Fannie Mae and Freddie Mac in creating a financial powder keg. The CRA forced banks to lend to non-credit worthy mortgage applicants, under threat of charter revocation. Fannie and Freddie functioned as taxpayer backed buyers of the bad debt, socializing much of the tail risk from the bad mortgages. Congress, especially Democrats, was responsible for most of this. W Bush tried to increase responsible supervision of FNMA but Congressional Democrats rebuffed him. Inevitably a decline in housing prices caused mortgage defaults at a higher than expected rate and the many leveraged bets made by banks and other institutions who had leaned on implicit govt guarantees blew up. The govt mismanaged the situation, in part by implementing mark-to-mkt rules for institution-held securities that led to fire-sale liquidations and cascading institutional failures. It was a complicated chain of events with much blame to go around. Accounts that blame everything on greedy bankers and long-term market trends miss the point. Congressional efforts to buy votes with easy mortgage money incentivized a speculative bubble that was bound to burst sooner or later.

  4. During the Clinton / Shrub era, there was a strong argument that home ownership was a contributing factor to (cause of ) middle class (WASP) virtues. Promote a family from drifting among apartments — shifting school districts mid-semester, never joining a church or even a bowling league, griping about ‘broken windows’ to a landlord instead of taking personal responsibility — set them up in a house of their own, and they will begin to settle down into the desirable behaviors of good citizens.

    There was a counter-argument that home ownership was a marker or proxy measure of the sorts of behaviors desired of good citizens. Thrift, deferred gratifications, stability, personal responsibility; virtues accumulate monetary capital as well as social capital and lead to investment in homes, neighborhoods, and communities. There are, so it was claimed, no shortcuts.

    The experiment was made. As it turns out, home ownership is, after all, a proxy, not a factor.

    It might have been nice to try the experiment in one single state rather than the nation as a whole …

  5. During the Clinton / Shrub era, there was a strong argument that home ownership was a contributing factor to (cause of ) middle class (WASP) virtues.

    Margaret Thatcher also bought into that theory and was pushing people to buy council houses.

    Maybe it was like the Bush invasion of Iraq, an error but worth a try once.

    Jonathan, that’s why I thought it an interesting piece. Maybe it was a bit of both. I sure saw some of the phenomena he described.

    The selling of loans to Fannie/Freddie was a late thing. I bought my last house before the meltdown with 20% down in 1991.

    I have no doubt the Democrats running Fannie/Freddie poured oil on the fire.

    We are back in the danger zone with 3% down payments again.

  6. I think home ownership is generally a good thing and govt shouldn’t make it more difficult than necessary. However, laws and regulations like the CRA go way beyond that, creating incentives for banks to lend to irresponsible people.

    I met an old Cuban guy who owns his own modest condo. He said that thirty years ago the City of Miami gave out $50k mortgages at 2% to poor people, as he put it. A local govt subsidizing mortgages for hard-working immigrants was probably a good bet. OTOH many of the subprime mortgages of the early 2000s were bad bets and it had to be obvious at the time. Banks have higher lending standards now because after 2008 there are higher costs to writing bad mortgages. There doesn’t appear to be as much speculative leverage or as much corruption of the mortgage application process. The next financial debacle is probably on the way but it will be different, perhaps in a different market sector.

  7. To a considerable extent, increase in housing prices (above the general inflation level) represents an intergenerational transfer of wealth, since older people are more likely to be selling and younger people are more likely to be buying. This isn’t totally true, since buyers (and sellers) also include non-US-residents, but it’s probably pretty close in general.

  8. an intergenerational transfer of wealth

    A house is like a retirement account that gets cashed in in one transaction. The sale proceeds usually go to fund another house purchase or into non-real estate savings and investments that ultimately fund other people’s housing purchases and businesses.

  9. There are very few places where anyone “cashes in” on a house. That notion is actually incredibly destructive and leads to people in most places having grossly unrealistic expectations of what their house is worth.

  10. “intergenerational transfer of wealth”

    The same is true, I’d argue, of stock prices that run ahead of rational multiples. Good for those selling, sucks to be those who need to invest money in such periods.

  11. Another analysis of the 2008 crisis.

    I agree with some of his arguments but not all.

    No. 1. Lehman’s collapse caused the crisis: “If only we had saved Lehman Brothers, we could have avoided the crisis,” goes a popular lament. This reflects a fundamental misunderstanding of the scale of the dislocations. To accept this premise — former Lehman employees are some of the loudest apostles of this theory — then one has to pretend an entire universe of other issues didn’t exist.

    I agree with this. If anything the previous Bear Stearns bailout was worse, just as Nicole Gelinas blames the 1984 bailout of Continental Illinois Bank.

    No. 2. If not for X, we would have been OK: Take your pick of things to insert here, but it’s important to understand that this was not a single event, but rather the result of many factors that came together over time. These include: the Federal Reserve’s ultralow interest rates, a fundamentally weak recovery from the dot-com collapse, the housing boom and bust, huge amounts of financial leverage, securitization of mortgages, the embrace of derivatives and reckless deregulation of the financial industry that enabled much of the above, and more

    I agree with this, too.

    No. 3. Repeal of Glass-Steagall: The argument is that in the decades after Glass-Steagall was enacted during the Great Depression, Wall Street crises were confined to Wall Street and didn’t spill onto Main Street. See as examples the 1987 stock-market crash or the Mexican peso crisis of 1994. But the causative issue we run into to is the but-for test. Would we have had a crisis if Glass-Steagall were still in place?

    The failed institutions were not Glass Steagall banks.

    No. 4. Bailouts were the only option: There were many other options, but they would have been very painful and required considerable foresight. I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts. I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest.

    I definitely agree with this.

    No. 5. Taxpayers were repaid in full and even made a profit: There are two major issues with this claim: The first is that the Troubled Asset Relief Program and most other loans and bailouts were all (or almost all) repaid. But to make that happen, the federal government in a move questioned by tax experts allowed failed American International Group to carry forward the net operating losses for use to offset future earnings; this was a stealth bailout worth tens of billions of dollars that didn’t appear to “cost” anything. Meanwhile the Federal Reserve kept rates at zero for almost a decade. This resulted in a huge transfer from savers to bailed-out lenders.

    Yes and we are still paying for ZIRP.

    No. 6. No one went to jail because stupidity isn’t a crime: This one is laugher, from the behavior of the executives at Lehman Brothers to all of the foreclosure fraud that took place. Jesse Eisinger, author of “The Chickenshit Club: Why the Justice Department Fails to Prosecute Executives,” explained how the white-collar defense bar successfully lobbied and undercut the Department of Justice during the years before the crisis.


    No. 7. Borrowers were as blameworthy as lenders: First, we know that for huge swaths of the banking industry, the basis for lending changed in the run-up to the crisis. For most of financial history, credit was granted based on the borrower’s ability to repay. In the years before the crisis, the incentive to lend shifted: It was based not on the likelihood of repayment but on whether a loan could be sold to someone else, often a securities firm, which would repackage the loan with other loans to create a mortgage-backed security. Selling 30-year mortgages with a 90-day warranty changes the calculus for who qualifies: just find a warm body that will make the first three payments; after that it’s someone else’s problem.

    Pretty true. He absolves borrowers but then flips to blame to brokers, which I do agree with.

    No. 8. Poor people caused the crisis: This is another intellectually dishonest claim. If any U.S. legislation such as the Community Reinvestment Act was the actual cause of the crisis, then the boom and bust wouldn’t have been global. Second, if poor people and these policies were the cause, then the crisis would have been centered in South Philadelphia; Harlem, New York; Oakland, California; and Atlanta instead of the burgeoning suburbs of Las Vegas, Southern California, Florida and Arizona. The folks making this argument seem to have questionable motivations.

    I call BS on this. The house flippers included lots of borrowers who had no business buying one house, let alone several.

    No. 9. The Fed made a mistake by stepping in when Congress refused: Congress is the governmental entity that should have done more in response to the crisis. But it didn’t, and all of those members who opposed efforts to repair the economy and financial system should have been thrown out of office. The Fed gave cover to Congress, creating congressional moral hazard and allowing it to shirk its responsibilities.

    I call BS on this, too. The Congress opposed TARP and it was imposed over their heads.

    No. 10. Lehman could have been saved: This is perhaps the most delusional of all the claims. Lehman was insolvent. We know this from an accounting sleight-of-hand it performed called Repo 105, in which it which “sold” $50 billion in holdings to an entity it owned, booked a profit just before quarterly earnings, then repurchased the holdings.

    I agree with this so he gets 4 of 10.

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