Welcome back to the Deep Dive. Today we are doing
something a little different. We usually look
forward or, you know, we look at the now. Right.
But today we're rewinding the clock, not to ancient
history, but to a time that I think most of us
remember vividly, or at least we think we remember
vividly. They're talking about the Great Recession,
December 2007 to June 2009. It's a period that
feels incredibly familiar because we all live
through the headlines. We remember the panic.
We remember the for sale signs on every lawn.
Oh, yeah. But when you actually sit down with
the source material, the thousands of pages from
the Financial Crisis Inquiry Commission, the
IMF data, the retrospective analysis from the
guys who were actually in the room, you realize
that what we know is mostly just. It's the surface
level scar tissue. We don't actually know the
anatomy of the injury. That is exactly how I
felt reading through the stack. I mean, I remember
Lehman Brothers collapsing. I remember the word
foreclosure being on the news every single night.
But looking at the actual mechanics, it is shocking.
how close the entire global operating system
came to just turning off. Like a light switch.
Like a light switch, exactly. It wasn't just
a recession. The sources are really clear on
this. It was the most severe economic and financial
meltdown since the Great Depression of the 1930s.
And that's not being dramatic. No, that isn't
me being dramatic. That is the formal conclusion
of the International Monetary Fund. And the thing
we need to stress right at the top is that this
wasn't just an American real estate problem.
Right. It's easy to think of it that way. It
is, but it's wrong. This was a global seizure.
It hit North America, South America, Europe,
Asia. I mean, it reshaped global politics. It
destroyed faith in democratic institutions. And
frankly, the world we're living in right now,
politically, economically, was born in the wreckage
of 2008. So here is the mission for this deep
dive. We are going to move past the buzzwords.
We've all heard subprime. We've all heard bailout.
I want to understand the actual machinery. I
want to understand this shadow banking system
that keeps coming up in the reports because honestly,
it sounds like something out of a spy novel.
It does sound illicit, doesn't it? But, you know,
understanding that shadow system is really the
skeleton key to the whole crisis. Exactly. And
we need to look at the conflicting narratives.
Was it bad mortgages? Was it greedy bankers?
Was it the government's fault? All of the above.
Yeah, maybe. We have to look at the legacy. So
to guide us, we are leaning heavily on the FCIC
report. That's the government's official autopsy,
along with analysis from economists like Paul
Krugman, Ben Bernanke, and just a massive timeline
of... global data. It is a heavy stack, for sure.
But the story it tells is absolutely fascinating.
So let's start with a reality check on the timeline.
Because the official dates of the recession are
December 2007 to June 2009. June 2009. Honestly,
that sounds ridiculous to me. I remember 2010.
I remember 2011. People were losing homes. Friends
were out of work for years. How can economists
look at that carnage and say, yep, it's over?
This is where we have to distinguish between
the economy as a calculator sees it and the economy
as, you know, human beings feel it. When economists
declare a recession is over, they are using a
very specific technical switch. Usually, a recession
is defined as two consecutive quarters of GDP
contraction. Basically, it's the pile of money
the country makes getting smaller. Okay, so as
long as the pile grows by even $1, the recession
is technically over. Precisely. By that very
narrow metric, the U .S. recession lasted 19
months. But there's a second, broader definition
of recession, which is just a period of reduced
economic activity and hardship. Which feels a
lot more real. It's the lived experience. And
by that metric, the Great Recession dragged on
for the better part of a decade. In fact, one
of our sources, the journalist Robert Kuttner,
argues that calling it the Great Recession is
a complete misnomer. Really? What does he want
to call it? He suggests the lesser depression
or even the great deflation. Wow. His argument
is that standard recessions are like a cold.
You get sick, you rest, you bounce back pretty
quickly. This was chronic. This was structural.
It was a deflationary trap that we couldn't just
grow our way out of. The lesser depression. Wow.
Well, that sets the mood nicely. Yeah. But to
understand why it was so bad, we have to look
at the setup. Because in 2005 or 2006, The world
seemed fine on the surface. It seemed great.
Everyone was making money. House prices were
going up. But underneath, there was this massive
pressure building. And the concept that really
blew my mind in the research was this idea of
the giant pool of money. Ah, yes. This is a concept
that was popularized by This American Life, but
the data behind it is absolutely staggering.
It describes the global savings glut. So if you
look at the entire world, there's a certain amount
of savings money that isn't being spent just
sitting there waiting to be invested. In the
year 2000, that global pool was about $35 trillion.
Okay, $35 trillion. Hard to visualize, but let's
say that's our baseline. 2008, just eight years
later, that number had doubled to $70 trillion.
Whoa, hold on. It doubled in eight years. That's
not just growth. That's a complete explosion.
Where does $35 trillion in new cash even come
from so quickly? Did we print it? Some of it
was credit creation, yes. But a huge chunk of
it came from two specific places. First, you
had the rapid industrialization of developing
nations, specifically China. Right. The factory
of the world. The factory of the world. They
were making everything, banking the profits and
saving it. Just incredibly high savings rates.
Second, you had the oil -rich nations, Saudi
Arabia, Abu Dhabi, Russia. Oil prices were skyrocketing
during this period. So you have these massive
piles of cash accumulating in Riyadh and Beijing.
Okay, so China and Saudi Arabia are sitting on
literal mountains of cash. Yeah. But I'm still
not connecting the dots. Why does that crash
the American housing market? Because that money
has to go somewhere. I mean, if you are a sovereign
wealth fund, you don't just stuff billions under
a mattress. You need to invest it. You need a
return. But, and this is the critical part, you
want safety. You don't want to gamble it all
on a startup. You want a safe, boring, predictable
return. And historically, what is the safest
investment in the entire world? U .S. government
bonds. Treasuries. Exactly. But here's the problem.
Because there was so much money flooding the
system, that $70 trillion pool, the demand for
U .S. treasuries was so high that the interest
rate just plummeted. Basic supply and demand.
Right. If everyone wants to lend you money, you
don't have to pay them much interest. So these
giant global investors started looking around.
They said, we want a safe place to put our money,
like the U .S., but we need a better return than
1 or 2 percent. And Wall Street hears that and
says, we have a product for you. Enter Wall Street.
They see this massive captive customer base,
this giant pool of money that is desperate for
a product that is safe like a bond but pays like
an investment. So they engineered the mortgage
-backed security. Okay. We need to unpack this.
Yeah. Because mortgage -backed security or MBS
is one of those terms that just makes people's
eyes glaze over. It does. But it's so central
to the story. It is. So think of it this way.
In the old days, right, you went to your local
bank. You asked for a mortgage. The banker looked
you in the eye. Maybe they knew your parents.
They gave you the money. And then you paid that
banker back for 30 years. The bank kept the mortgage
on its books. Right. It's a relationship. There's
accountability. Exactly. The bank cared if you
paid it back. But in the 2000s, the system completely
changed. The bank lends you the money, but they
don't keep the mortgage. They sell it, sometimes
within days, to Wall Street. Wall Street takes
your mortgage, staples it together with thousands
of other mortgages, some from Florida, some from
California, some from Ohio, and turns that bundle
into a bond. Then they sell slices of that bond
to the giant pool of money. So the investors
in China or Saudi Arabia aren't betting on me
personally paying my mortgage. They're betting
on thousands of Americans paying their mortgages
all at once. Correct. And the theory, the big
sales pitch was, look, maybe one guy defaults,
maybe 10 guys default, but everyone won't default
at the same time. The U .S. housing market has
never, ever crashed nationwide. So the rating
agencies, Moody's, S &P, slapped a triple A rating
on these bonds. The highest rating you can get.
The same rating as U .S. Treasuries. And the
giant pool of money bought them up by the boatload.
This created this insatiable demand. And because
Wall Street could sell these mortgages as fast
as they could make them, they just needed more
and more mortgages. They needed more raw material
for the machine. That's it. Exactly. This is
the supply chain of the crisis. To make more
bonds, you need more homebuyers. Eventually,
you run out of people with good credit and a
20 % down payment. So what do you do? You lower
the standards. You lower the standards. You start
lending to people with lower credit scores, the
so -called subprime borrowers. You stop asking
for proof of income. These are the infamous Anaya
Angel loans. No income. No Job. I remember hearing
about those. And I remember thinking, who on
earth would lend money to someone with no job?
But now it makes perfect sense. The person lending
the money didn't care if it got paid back. Because
they were just selling the loan to Wall Street
five minutes later. Bingo. The risk was severed
from the originator. The local mortgage broker
got their fee and the hot potato was passed up
the chain. And this brings us to the real engine
room of the crisis. The shadow banking system.
Right. The spy novel term. It sounds like loan
sharks in a back alley, I know. It really does.
But it's actually much more sophisticated and
because of that, much more dangerous. To understand
shadow banking, we first have to agree on what
a real bank does. A normal bank like Wells Fargo
or Bank of America. Okay. You put your money
in a savings account. That money is short term.
You can take it out whenever you want. The bank
then lends that money out for a 30 year mortgage,
which is long term. This basic function is called
maturity transformation. It's inherently risky.
Because if everyone wants their cash back today,
the bank can't just call up all the homeowners
and demand the mortgage back. Right. That's the
classic run on the bank. It's a wonderful life.
George Bailey panicking. The money's not here.
It's in your house and your house. Exactly. So
to prevent that, after the Great Depression,
the government created deposit insurance, the
FDIC. If the bank fails, the government pays
you up to a certain limit. That keeps everyone
calm and prevents panics. A crucial safety net.
A crucial safety net. Now, shadow banking is
doing the exact same thing, taking short -term
cash and lending it long -term, but without the
insurance and without the regulation. So give
me a concrete example. How does a shadow bank
work in practice? Who were these entities? The
biggest players were the investment banks themselves.
Lehman Brothers, Bear Stearns, Goldman Sachs.
And the key mechanism was the repo market. Repo
market. It's the engine of shadow banking. Imagine
you are Lehman Brothers. You are holding billions
of dollars in these mortgage bonds we talked
about. You want to buy more. You don't have cash
on hand, but you have these bonds as an asset.
So you go to a money market fund, maybe a fund
managing cash for General Electric or a giant
pension fund, and you say, I will sell you this
bond for $100 cash today, and I promise to buy
it back tomorrow for $101. It's like a pawn shop.
You're pointing your bonds overnight for cash.
It is exactly a pawn shop for billionaires. It's
a repurchase agreement. or repo. Lehman gets
cash to play with for 24 hours. The money market
fund gets a supposedly safe bond as collateral
and makes a tiny bit of interest. They did this
every single night with trillions of dollars.
Trillions every night. Every single night. By
early 2009, our sources show the shadow banking
system had assets of roughly $62 trillion. For
context, the entire traditional regulated banking
system only had about $39 trillion in assets.
So the unregulated system was significantly larger
than the real banking system. Way bigger. So
you have a system. Bigger than the actual banks,
where money is being borrowed every single night
to fund 30 -year mortgages, and there is absolutely
no safety net. No FDIC. None. If that money market
fund gets scared, if they suddenly think your
collateral, that mortgage bond, is worthless,
they just say no. They don't have to roll over
the loan. They just don't renew the pawn ticket
for the next day. And suddenly, Lehman Brothers
has to come up with... billions of dollars in
cash instantly to pay back yesterday's loan.
If they can't, they're bankrupt instantly. It's
terrifying. It's like building a 21st century
financial skyscraper on a 19th century foundation.
Or with no foundation at all. A 19th century
lack of safeguards is a better way to put it.
And that brings us to the trigger. We have the
giant pool of money inflating the bubble. We
have the shadow banking system amplifying the
risk to an insane degree. Now, all we need is
the pin. The housing market finally turns. It
peaked in 2006. Alan Greenspan, the Fed chair,
admitted in 2005 there was some froth in the
market. The Economist was more blunt. They called
it the biggest bubble in history. Froth is a
bit of an understatement. just a bit prices got
so high that people just couldn't afford to buy
even with the craziest loans so prices started
to drift down and this is where the ugly math
of leverage absolutely kills you if you bought
a half million dollar house with zero percent
down and the price drops just five percent you
are now twenty five thousand dollars under water
you owe more than the house is worth And a lot
of these loans had those teaser rates, right?
They started low and then reset to something
huge two or three years later. Yes, that was
the whole model. So the plan for these borrowers
was always, I'll just refinance in two years
before the rate resets. But now the house is
worth less than the loan. The bank won't let
you refinance. Your payment suddenly triples.
You can't pay. You default. And when those defaults
started trickling in and then flooding in, those
safe, triply bonds started to look, well. Not
so safe anymore. I want to focus on the timeline
of the panic here because we tend to think it
all happened in one week in September 2008. But
the tremor started way, way earlier. In August
2007, a French bank, BNP Paribas, froze three
of its investment funds because they said they
couldn't value the subprime assets inside them.
They couldn't even put a price on them. They
couldn't price them. That was the first major
tremor. That was the moment the smart money started
to run. The repo market, that pawn shop we talked
about, started to seize up. Lenders started saying,
you know what? I don't want that mortgage bond
as collateral. I don't trust it. Give me a treasury
bond instead. And we actually saw a physical
bank run in the UK, right? Northern Iraq. With
the lines of people. September 2007. This was
a jarring visual for the modern world. We had
not seen lines of people queuing around the block
to withdraw cash since the 1930s. Northern Rock
was a bank that relied very heavily on that short
-term wholesale funding, the shadow banking model.
When the market froze, they couldn't fund their
daily operations. But the U .S. system, it kind
of kept limping along for another year after
that. It did. Bear Stearns, a major investment
bank, failed in March 2008 and was basically
sold to J .P. Morgan for pennies on the dollar.
The government, the Fed, helped broker that deal
to prevent a wider panic. And everyone sort of
breathed a sigh of relief. Everyone thought,
OK, the worst is over. The government is managing
it. They have a playbook. And then came September
15, 2008. Lehman Brothers. The weekend that changed
the world. The government, led by Treasury Secretary
Hank Paulson and Fed Chair Ben Bernanke, tried
desperately to find a buyer for Lehman. They
couldn't. And they made the decision, or as they
argued, felt they had no legal choice, to let
it file for bankruptcy. Why was Lehman different?
Why did letting Lehman go essentially push the
global economy off a cliff when Bear Stearns
didn't? Because it shattered the one remaining
pillar of trust, the assumption that the government
would always be the backstop for a major firm.
It was called moral hazard, the idea that you
shouldn't bail people out. But once Lehman went
down, the market's belief in a safety net was
gone. Panic went from linear to exponential.
And this is where that obscure thing, the reserve
primary fund, becomes the main character in the
story, right? Yes. This is absolutely crucial
to understanding the speed of the collapse. The
reserve primary fund was a money market fund.
It was supposed to be as safe as cash. For every
dollar you put in, you always, always get a dollar
out. It's where big corporations keep their payroll
cash. OK, so it's supposed to be boring and safe.
The safest. But they held a small amount of Lehman
Brothers debt. When Lehman collapsed, that debt
became worthless and the fund broke the buck.
Explain that phrase, broke the buck. To a normal
person, it sounds like losing a few cents. No
big deal. It sounds trivial, but in the financial
world, it's catastrophic. It's like finding out
the ruler you use to measure a meter is actually
only 97 centimeters long. It means the shares
in this safe as cash fund were no longer worth
$1. They were worth maybe 97 cents. This caused
an immediate system wide run on every money market
fund in America. Everyone tried to pull their
cash out at once. Investors pulled $196 billion
out in a single week. And if the money market
funds empty out. Then the commercial paper market
stops. And the commercial paper market is where
General Electric, Ford, Toyota, even Verizon
borrow money day to day to pay their workers
and buy parts for their factories. So this isn't
about stock prices anymore? No. This is about
whether the biggest companies in the world can
make payroll next Friday. We were days, maybe
hours, away from ATM stopping and global supply
chains completely freezing. It wasn't just a
stock market crash. It was the entire circulatory
system of the real economy stopping. And right
in the eye of this hurricane sits AIG. Now, AIG
is an insurance company. My parents have life
insurance with them. Why are they at the dead
center of a global banking collapse? Because
of a little, barely regulated financial instrument
called a credit default swap, or CDS. Okay, we
need a good analogy here. I've heard it called
fire insurance, but that feels too simple. The
fire insurance analogy works, but let's modify
it a bit to show the absolute insanity of the
situation. Imagine you buy a house, you buy fire
insurance on it. If it burns down, the insurance
company pays you. Makes sense. Simple enough.
Now, imagine that I, your neighbor, can also
buy fire insurance on your house. And the person
across the street can buy fire insurance on your
house. In fact, everyone in the city can buy
a policy betting that your house will burn down.
Okay, so now there are hundreds of policies on
my one house. So if my house catches fire? The
insurance company doesn't just pay you for your
loss. They have to pay everyone in the city who
bet on your house burning. That is a credit default
swap. Speculators were using these to bet that
mortgage bonds would fail even if they didn't
own the bonds. And AIG was the insurance company
writing all these policies. AIG's financial products
division, a little office in London, was writing
these swaps by the tens of billions. They were
just collecting the premiums free money, basically,
because their computer model said a nationwide
housing collapse has a zero percent probability.
They were picking up nickels in front of a steamroller.
And when Lehman failed and the housing market
crashed for real, the steamroller hit them. They
owed tens of billions of dollars in payouts essentially
overnight. They didn't have the cash. And here
is why the government panicked and had to step
in. If AIG went bankrupt, they wouldn't be able
to pay the banks on the other side of those bets.
Goldman Sachs, Deutsche Bank, Societe Generale
in France, they were all counterparties to AIG.
If AIG failed, those giant global banks might
fail too. So the bailout of AIG, which was over
$100 billion of taxpayer money, wasn't really
to save the insurance company. No. It was a pass
through. The money went into AIG's front door
and AIG immediately handed it out the back door
to the global banks to settle these casino bets.
It was a backdoor bailout of the entire global
financial system. It makes my blood boil just
hearing it retold. Yeah. And speaking of boiling
blood, let's talk about the autopsy. The Financial
Crisis Inquiry Commission, the FCIC. What did
they actually conclude? Was this just a perfect
storm that nobody could have possibly predicted?
That is the excuse Wall Street loves to use.
It was a 100 -year flood, an act of God. Nobody
could have seen it, the FCIC majority report
said. Nonsense. Their final verdict was that
the crisis was avoidable. Avoidable. Yes. It
was the result of human action. inaction and
widespread failure. They cited massive failures
in financial regulation, reckless corporate governance,
excessive borrowing and just systemic breaches
of ethics at all levels. But there were dissenting
views in that report, right? I mean, I still
hear people today saying it was the government's
fault. Fannie Mae and Freddie Mac forced banks
to lend to poor people. That is the primary dissenting
narrative, and it came largely from the Republican
members of the commission. They argued that government
policies like the Community Reinvestment Act
and affordable housing goals pushed banks into
making bad loans they otherwise wouldn't have
made. So is there any truth to that narrative?
Well, there is a grain of truth in that U .S.
housing policy for decades has encouraged homeownership.
But as a primary cause of the crisis, the data
shows it really falls apart under scrutiny. The
FCIC majority and economists like Paul Krugman
point. out a few smoking guns. First the real
explosion in toxic subprime lending happened
after 2004. What happened in 2004? The SEC relaxed
capital rules for investment banks, allowing
them to take on way more debt. It wasn't because
of some new government housing mandate. OK. Second,
the absolute worst of the loans, the ones with
the highest default rates, were made by private
lenders like Countrywide Financial, who weren't
even subject to the Community Reinvestment Act.
And then there's the biggest counter argument.
Europe. Exactly. We had massive, even bigger
housing bubbles in Spain, Ireland, and the U
.K. Did the U .S. Community Reinvestment Act
force Spanish banks to lend to construction companies
in Madrid? Of course not. This was a global bubble
fueled by cheap credit and deregulation, not
a uniquely American government housing program.
There is also another narrative about who was
actually defaulting that I found really surprising
in the source material. We have this popular
image of the subprime borrower being a low -income
family just trying to buy their first home. show
something else entirely. Yes, this is narrative
number five in our source material, the flippers.
A really important study by the New York Fed
showed that a huge percentage of the defaults,
particularly in the hardest hit areas like Florida
and Arizona, came from real estate investors.
Speculators. Yes, people with good credit scores
who were buying a second or a third or a fourth
home purely to flip it for a profit a year later.
So when prices started to drop. These weren't
families losing. their only roof over their heads.
These were investors looking at a spreadsheet,
realizing the asset was underwater and making
a cold, calculated business decision called a
strategic default. They just walked away and
mailed the keys to the bank. So the story that
this was all caused by poor people borrowing
too much is, well, it's largely imaginary history.
It's a convenient narrative, but it's not supported
by the facts. It was driven just as much, if
not more, by the greedy middle and upper class
chasing easy money in the bubble. I want to zoom
out now. focused a lot on the U .S. mechanics,
which were central. But this was the global financial
crisis. Let's talk about the impact around the
world, because some countries got absolutely
hammered and some weirdly survived. The European
experience was actually, in some ways, even worse
and more prolonged than the American one. In
the U .S., we had a banking and housing crisis.
In Europe, it mutated into a full -blown sovereign
debt crisis. Explain that mutation. How does
a bad mortgage in Florida become a crisis for
the entire government of Greece? It's all about
Chepagian. European banks were holding a lot
of those toxic U .S. mortgage assets. When those
assets went bad, the banks started to fail. So
European governments like Ireland's had to step
in and bail them out. They took the private bank
debt onto the public balance sheet. Exactly.
That cost billions and billions of euros. Suddenly,
countries like Ireland and Spain had these massive
government debts. Investors looked at that and
then they looked at countries that already had
high debt, like Greece or Portugal, and they
said, hang on. I don't think you can pay all
this back. So they stopped lending to the countries
themselves. And this led directly to the policy
response that people still argue about today.
Austerity. This is one of the great economic
tragedies of the entire era. Around 2010, the
global policy narrative shifted from simulate
the economy to create jobs to cut government
debt at all costs. The logic was we are broke.
We need to tighten our belts. Which, you know,
sounds like common sense. If I lose my job, I
stop eating out. I cut my budget. That is the
household fallacy, and it's a dangerous one.
For a single household, that makes sense. But
for a government, your spending is someone else's
income. If the government cut spending during
a massive recession, they fire workers, they
cancel construction contracts, they cut benefits.
Those people then have less money. So they spend
less. The economy shrinks even more. And when
the economy shrinks. What happens to tax revenue?
It falls. It falls. So you cut spending to try
and pay off your debt, but you accidentally crash
your own revenue, which makes your debt to GDP
ratio look even bigger. It's a death spiral.
It's a complete death spiral. The IMF eventually
admitted years later that they had massively
underestimated the fiscal multiplier. They thought
for every euro of cuts, the economy would shrink
a little. It turned out for every euro of cuts,
the economy shrank by 1 .50 euros or more. Greece
lost 25 % of its GDP. That is Great Depression
-level misery inflicted by policy choice. Now
let's look at the survivors. Who made it out
of this alive? Poland keeps coming up in the
research as the star student of the crisis. Poland
is fascinating. It's the only EU country that
completely avoided a recession during the crisis.
Not one single quarter of negative growth. Oh,
are they wizards? No wizards. Just a combination
of good structural advantages and a bit of luck.
First, they didn't have a big credit boom before
the crash, so their households and companies
weren't drowning in debt. Second, and this is
key, they have their own currency, the zloty.
They aren't on the euro. They are not on the
euro. Yeah. When the global crisis hit, the zloty
lost value against other currencies. That sounds
bad for the average person. Their savings are
worth less. It is painful, yes. But it acts as
a massive economic shock absorber. A cheaper
currency makes your exports cheaper for the rest
of the world. Suddenly, everyone wanted to buy
Polish goods because they were on sale. It kept
their factories running. So they could devalue
their way to competitiveness. Exactly. Contrast
that with Greece or Spain. They used the euro.
They couldn't devalue their currency. The only
way they could become more competitive was through
internal devaluation, which means slashing wages
and firing people. A much, much more painful
path. OK, so having your own currency saved them.
What about Australia? I've heard they dodged
it, too. Australia avoided a technical recession
completely. They call themselves the lucky country.
And in 2008, their luck was geography. They are
right next door to China. And China is the elephant
in the room. We haven't discussed enough. While
the entire Western world was imploding, what
was China doing? China looked at the global collapse
and essentially said. Not on our watch. They
unleashed a government stimulus package that
was on a relative scale staggering. Five hundred
and eighty six billion dollars. That was about
16 percent of their entire GDP at the time. 16
percent. The U .S. stimulus was big. But it was
nowhere near 16 % of GDP. Not even close. It
was maybe 5 % or 6%. China basically poured concrete
over the problem. They built high -speed rail,
entire new cities, airports, roads. To do all
that construction, they needed vast amounts of
steel, iron ore, copper, and energy. And where
does all that stuff come from? Where does iron
ore come from? Australia. Where does copper come
from? Chile. Where does soy come from to feed
the workers? Brazil. So China's massive stimulus
essentially put the entire global commodity economy
on its back. and carried it for two years. They
did. Their relentless demand kept the commodity
-producing countries afloat. If China hadn't
done that stimulus, the Great Recession would
have almost certainly become a full -blown global
depression. There's no question about it. Let's
pivot back to the U .S. response and the controversy
around it. We had TARP, the Troubled Asset Relief
Program, the bank bailout, $700 billion. People
were furious. They are still furious about it.
The anger was visceral. And understandable. You
had families losing their homes, their life savings,
and the guys who literally built the bomb were
getting golden parachutes funded by taxpayer
money. It felt like a massive betrayal. But here
is a fact from the reports that drives people
crazy, even though it's true. The government
actually made a profit on the bank bailouts.
Wait, really? We made money on TARP. We did.
The Treasury didn't just give the money away.
They lent it, they charged interest, and they
took equity warrants in the banks. When the banks
recovered and their stock prices went up, they
paid it all back with interest. The government
recorded a net profit of roughly $87 billion
on the core banking programs. So on a spreadsheet,
it was a wild success. We stopped the collapse
and made a profit for the taxpayer. Strictly
financially, yes. But you cannot measure the
social and political cost in dollars. The message
it sent to the public was, if you are big enough
and rich enough to threaten the system, the government
will save you from your own mistakes. If you
are a regular person who lost their home, you're
on your own. That shattered the social contract.
And besides the bailout, we also had the stimulus
bill, the ARRA. About $800 billion for things
like infrastructure and tax cuts. Was it enough?
Most economists looking back now say no, it wasn't
nearly enough. Paul Krugman was screaming at
the time that it needed to be double that size
to be effective. Why wasn't it? The big problem
was while the federal government was trying to
pump gas into the economy, state and local governments
were slamming on the brakes. States, unlike the
feds, have to balance their budgets every year.
So with their tax revenues collapsing, they were
firing teachers, police officers, and firefighters
by the thousands. So the federal stimulus was
just filling the hole left by the state cuts.
It basically just offset the austerity at the
state level. It prevented a depression, which
is a huge achievement, but it wasn't big enough
to launch a quick, robust recovery. And then
there was the Fed. Ben Bernanke. He cut interest
rates to zero. And when that didn't work, he
started this experimental policy. Quantitative
easing. This was the great experiment of the
crisis. The Fed creates money electronically,
literally types zeros into a computer and uses
that new money to buy government bonds and mortgage
backed securities from the banks. They were buying
$85 billion worth a month at the peak. And the
goal of that was what? To just flood the system
with cash. The goal was to force long term interest
rates down across the entire economy and crucially
to force investors to buy riskier assets. If
the Fed is buying all the safe bonds, investors
have to go buy stocks and corporate bonds instead,
which pushes up their prices. And it worked right.
The stock market bottomed in March 2009 and then
went on one of the longest bull runs in history.
It works spectacularly well for asset prices.
But here is the fundamental rub. Who owns assets?
Rich people. The wealthy. Exactly. The top 10
percent of Americans on something like 89 percent
of all stocks. The bottom 50 percent own almost
none. So the main policy tool that saved the
economy worked by inflating the wealth of the
people who already had wealth. This is why we
saw such a pronounced K -shaped recovery. The
top of the K went straight up while the bottom
of the K stayed flat or went down. And this brings
us to the legacy. the long tail of this crisis.
Because you can't have a financial earthquake
this big without massive political tsunamis following
in its wake. You can draw a direct bright red
line from the chaos of 2008 and the policy responses
to it to the political instability and polarization
we are living with today. Let's trace that line.
Okay. In the U .S., the immediate anger at the
bailouts and the stimulus burst the Tea Party
movement on the right. They were furious about
government spending and what they saw as crony
capitalism. And on the left? On the left, a couple
of years later, you had Occupy Wall Street. Their
slogan was, we are the 99%. Different ideologies,
different solutions, but the same underlying
rage. The system is rigged. Precisely. And that
rage doesn't just go away when the stock market
recovers. It festers. Political scientists have
shown that major financial crises often lead
to a significant rise in populism about five
to 10 years later. And just look at the timeline.
The crisis is in 2008. By 2016, you have the
rise of Bernie Sanders on the left and Donald
Trump on the right. Both running as anti -establishment
outsiders, attacking the status quo. Both tapping
into that deep seated feeling that the experts
in Washington and on Wall Street had failed the
working class. Trump appealed directly to the
forgotten man, the people in the parts of the
country that were left behind by that K -shaped
recovery. And we saw the same dynamic play out
in Europe, too. with Brexit. Absolutely. The
UK suffered massively from years of austerity
after the crisis. Yeah. Real wages were stagnant
for a decade when the Brexit vote came in 2016.
For many people, it was largely a vote of no
confidence in the entire establishment. It was
the experts in London say Brexit will be bad
for the economy. Well, the same experts said
the economy was fine in 2007. Why should we ever
trust them again? The sources also mentioned
this darker trend of democratic backsliding.
Yeah. This is the really chilling part. The data
shows that in times of extreme economic fear
and insecurity, people often become more receptive
to strongman leaders and authoritarian politics.
We saw significant shifts toward authoritarianism
in places like Hungary, in Turkey and a consolidation
of power in Russia. When democracy doesn't seem
to be delivering prosperity, people start to
question if democracy itself is worth it. That
is a chilling thought. So as we wrap up this
autopsy, let's try to synthesize the whole thing.
We had a shadow banking system that was a ticking
time bomb. We had a housing bubble fueled by
this giant pool of global cash. And we had regulators
who were either captured by the industry or just
asleep at the wheel. And we responded by fixing
the banks. We patched the plumbing of the financial
system. But we largely left the homeowners, the
actual people, underwater. So here's the final
provocative thought I want to leave everyone
with. We keep asking the question, could it happen
again? And the banks and regulators always tell
us, no, we have much higher capital requirements
now. We are safe. And they're right in a narrow
sense. The big banks are safer. JP Morgan is
a fortress now. But remember. The shadow banking
system. The pawn shop for billionaires. It didn't
go away. It just changed shape. It moved. Now
we have a massive private credit market. We have
non -bank lenders that originate more mortgages
than the actual banks do. We have crypto, which
is essentially a shadow banking system on steroids,
completely unregulated, highly leveraged, and
prone to bank runs. So we locked and bolted the
front door of the house, but we left the back
window wide open. And the fundamental inequality
that drove the debt bubble in the first place,
the fact that for decades people's wages were
flat so they had to borrow more and more to maintain
their standard of living, that is worse today
than it was in 2007. So the final question is,
did we actually fix the car or did we just patch
the tire while it's still speeding down the highway
with a faulty engine? I think we all know the
answer we are afraid of. Something to chew on
the next time you see a headline about record
stock market highs. That's it for this deep dive
into the Great Recession. Thanks for listening.