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.
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.