Skip to content Skip to footer

Ten Years After Financial Crisis, Our Elites Have Learned Nothing

The housing bubble was also the story of the Great Recession.

(Photo: BrianAJackson / iStock / Getty Images Plus)

Last week, I heard BBC announce the 10th anniversary of the beginning of the financial crisis. This is dated to the decision by the French bank BNP Paribas to prohibit withdrawals from two hedge funds that were heavily invested in subprime mortgage backed securities. According to BBC, this was when lending began to freeze and house prices began to fall.

The problem with BBC’s story is that house prices had already been falling for more than a year. While the nationwide decline was still relatively modest, around 4 percent, the drop in many of the most active markets was more than 10 percent.

This was the reason that the mortgage-backed securities in the Paribas hedge funds had plunged in value. When people bought homes with zero or near zero down, and the price dropped by 10 percent (and was falling rapidly), the mortgages suddenly did not look like very good investments.

While some people may try to make good on a mortgage that exceeded the value of their home, many others would simply walk away. This was especially likely when the mortgage was an adjustable rate mortgage that was due to reset to a much higher interest rate in the next year or two.

This timing matters because the financial crisis was first and foremost the story of the housing bubble. If mortgage debt had not been tied to an asset that was hugely over-valued, there would not have been a crisis shaking the financial system. This is true even if we recognize the corruption of the financial sector and the number of people who were dealing in complex financial instruments they did not understand.

It is understandable that economists and economic reporters would like to turn attention away from the housing bubble since it was easy to see for anyone paying attention at the time. The country had an unprecedented nationwide run-up in house prices, as house sale prices rose far faster than the overall rate of inflation across most of the country. This was a break with the usual pattern where nationwide house prices just tracked inflation.

This should have set off alarm bells, not only because the run-up was extraordinary, but because there was no remotely corresponding change in rents. The rental indexes barely outpaced the rate of inflation in these years. Also, even as house sale prices were going through the roof, the vacancy rate for housing was reaching record levels.

The fact that houses were being purchased with dubious loans was also hardly a secret. It was common to refer to “NINJA” loans, which stood for “no income, no job and no assets.” Banks were happy to make loans to anyone who would take them since they knew they could resell these loans almost immediately in the secondary market.

A survey by the National Association of Realtors found that 43 percent of first-time buyers in 2005 had a down payment of zero or less on their mortgage. The “or less” refers to the fact that some homebuyers actually borrowed more than the sale price in order to get money to cover closing costs, renovations or moving expenses.

The housing bubble was also the story of the Great Recession. The housing bubble was driving the economy in the years leading up to the crash. Soaring house prices lead to an unprecedented boom in construction, which peaked at just under 6.5 percent of GDP. This would be more than $1.2 trillion annually in today’s economy. After the crash, the glut of housing led construction to fall to less than 2 percent of GDP. Anyone have a quick way to fill a demand gap of $800 billion a year?

But it was actually worse than this. Soaring house prices led to an unprecedented consumption boom as people spent against the bubble generated equity in their homes. When prices came back down to Earth and the equity disappeared, people cut back their spending accordingly. We lost the equivalent of more than $500 billion in annual demand due to the fall in consumption in the wake of the crash.

In all, we were looking at a demand gap on the order of 7-8 percentage points of GDP, or $1.4 to $1.6 trillion in today’s economy. The Obama stimulus, which was less than 2 percent of GDP in 2009 and 2010, was helpful, but nowhere near large enough, nor did it last long enough. The result was the slow and weak recovery that we have seen.

The economic disaster that cost millions of people their jobs and/or their homes, and forced tens of millions to accept lower wages, was 100 percent avoidable if the people responsible for making economic policy had been awake. Turning the story of the housing bubble into a story about the financial crisis is an effort to make issues that are quite simple seem very complicated.

This is a way to let those who are responsible off the hook, since, hey, it’s complicated. And if they have to rewrite history to make the case, well that can be done.

Truthout Is Preparing to Meet Trump’s Agenda With Resistance at Every Turn

Dear Truthout Community,

If you feel rage, despondency, confusion and deep fear today, you are not alone. We’re feeling it too. We are heartsick. Facing down Trump’s fascist agenda, we are desperately worried about the most vulnerable people among us, including our loved ones and everyone in the Truthout community, and our minds are racing a million miles a minute to try to map out all that needs to be done.

We must give ourselves space to grieve and feel our fear, feel our rage, and keep in the forefront of our mind the stark truth that millions of real human lives are on the line. And simultaneously, we’ve got to get to work, take stock of our resources, and prepare to throw ourselves full force into the movement.

Journalism is a linchpin of that movement. Even as we are reeling, we’re summoning up all the energy we can to face down what’s coming, because we know that one of the sharpest weapons against fascism is publishing the truth.

There are many terrifying planks to the Trump agenda, and we plan to devote ourselves to reporting thoroughly on each one and, crucially, covering the movements resisting them. We also recognize that Trump is a dire threat to journalism itself, and that we must take this seriously from the outset.

Last week, the four of us sat down to have some hard but necessary conversations about Truthout under a Trump presidency. How would we defend our publication from an avalanche of far right lawsuits that seek to bankrupt us? How would we keep our reporters safe if they need to cover outbreaks of political violence, or if they are targeted by authorities? How will we urgently produce the practical analysis, tools and movement coverage that you need right now — breaking through our normal routines to meet a terrifying moment in ways that best serve you?

It will be a tough, scary four years to produce social justice-driven journalism. We need to deliver news, strategy, liberatory ideas, tools and movement-sparking solutions with a force that we never have had to before. And at the same time, we desperately need to protect our ability to do so.

We know this is such a painful moment and donations may understandably be the last thing on your mind. But we must ask for your support, which is needed in a new and urgent way.

We promise we will kick into an even higher gear to give you truthful news that cuts against the disinformation and vitriol and hate and violence. We promise to publish analyses that will serve the needs of the movements we all rely on to survive the next four years, and even build for the future. We promise to be responsive, to recognize you as members of our community with a vital stake and voice in this work.

Please dig deep if you can, but a donation of any amount will be a truly meaningful and tangible action in this cataclysmic historical moment.

We’re with you. Let’s do all we can to move forward together.

With love, rage, and solidarity,

Maya, Negin, Saima, and Ziggy