WEBVTT 00:00:00.000 --> 00:00:02.419 Welcome back to the Deep Dive. Today we are doing 00:00:02.419 --> 00:00:04.480 something a little different. We usually look 00:00:04.480 --> 00:00:07.179 forward or, you know, we look at the now. Right. 00:00:07.280 --> 00:00:10.859 But today we're rewinding the clock, not to ancient 00:00:10.859 --> 00:00:13.460 history, but to a time that I think most of us 00:00:13.460 --> 00:00:17.039 remember vividly, or at least we think we remember 00:00:17.039 --> 00:00:19.019 vividly. They're talking about the Great Recession, 00:00:19.140 --> 00:00:24.000 December 2007 to June 2009. It's a period that 00:00:24.000 --> 00:00:26.640 feels incredibly familiar because we all live 00:00:26.640 --> 00:00:28.879 through the headlines. We remember the panic. 00:00:28.940 --> 00:00:31.019 We remember the for sale signs on every lawn. 00:00:31.179 --> 00:00:33.140 Oh, yeah. But when you actually sit down with 00:00:33.140 --> 00:00:36.840 the source material, the thousands of pages from 00:00:36.840 --> 00:00:38.780 the Financial Crisis Inquiry Commission, the 00:00:38.780 --> 00:00:41.179 IMF data, the retrospective analysis from the 00:00:41.179 --> 00:00:43.840 guys who were actually in the room, you realize 00:00:43.840 --> 00:00:49.259 that what we know is mostly just. It's the surface 00:00:49.259 --> 00:00:51.579 level scar tissue. We don't actually know the 00:00:51.579 --> 00:00:54.640 anatomy of the injury. That is exactly how I 00:00:54.640 --> 00:00:57.380 felt reading through the stack. I mean, I remember 00:00:57.380 --> 00:00:59.439 Lehman Brothers collapsing. I remember the word 00:00:59.439 --> 00:01:01.960 foreclosure being on the news every single night. 00:01:02.079 --> 00:01:07.000 But looking at the actual mechanics, it is shocking. 00:01:07.659 --> 00:01:10.439 how close the entire global operating system 00:01:10.439 --> 00:01:13.180 came to just turning off. Like a light switch. 00:01:13.420 --> 00:01:15.159 Like a light switch, exactly. It wasn't just 00:01:15.159 --> 00:01:17.760 a recession. The sources are really clear on 00:01:17.760 --> 00:01:21.019 this. It was the most severe economic and financial 00:01:21.019 --> 00:01:24.079 meltdown since the Great Depression of the 1930s. 00:01:24.079 --> 00:01:26.000 And that's not being dramatic. No, that isn't 00:01:26.000 --> 00:01:27.920 me being dramatic. That is the formal conclusion 00:01:27.920 --> 00:01:30.299 of the International Monetary Fund. And the thing 00:01:30.299 --> 00:01:32.260 we need to stress right at the top is that this 00:01:32.260 --> 00:01:34.200 wasn't just an American real estate problem. 00:01:34.459 --> 00:01:36.500 Right. It's easy to think of it that way. It 00:01:36.500 --> 00:01:39.439 is, but it's wrong. This was a global seizure. 00:01:39.659 --> 00:01:42.140 It hit North America, South America, Europe, 00:01:42.340 --> 00:01:44.959 Asia. I mean, it reshaped global politics. It 00:01:44.959 --> 00:01:47.760 destroyed faith in democratic institutions. And 00:01:47.760 --> 00:01:50.760 frankly, the world we're living in right now, 00:01:50.879 --> 00:01:53.439 politically, economically, was born in the wreckage 00:01:53.439 --> 00:01:56.200 of 2008. So here is the mission for this deep 00:01:56.200 --> 00:01:58.879 dive. We are going to move past the buzzwords. 00:01:59.159 --> 00:02:01.859 We've all heard subprime. We've all heard bailout. 00:02:02.829 --> 00:02:04.870 I want to understand the actual machinery. I 00:02:04.870 --> 00:02:06.709 want to understand this shadow banking system 00:02:06.709 --> 00:02:09.469 that keeps coming up in the reports because honestly, 00:02:09.689 --> 00:02:11.289 it sounds like something out of a spy novel. 00:02:11.469 --> 00:02:13.840 It does sound illicit, doesn't it? But, you know, 00:02:13.879 --> 00:02:15.800 understanding that shadow system is really the 00:02:15.800 --> 00:02:18.800 skeleton key to the whole crisis. Exactly. And 00:02:18.800 --> 00:02:20.580 we need to look at the conflicting narratives. 00:02:20.620 --> 00:02:23.699 Was it bad mortgages? Was it greedy bankers? 00:02:23.840 --> 00:02:25.860 Was it the government's fault? All of the above. 00:02:26.159 --> 00:02:28.819 Yeah, maybe. We have to look at the legacy. So 00:02:28.819 --> 00:02:31.460 to guide us, we are leaning heavily on the FCIC 00:02:31.460 --> 00:02:33.840 report. That's the government's official autopsy, 00:02:33.840 --> 00:02:36.300 along with analysis from economists like Paul 00:02:36.300 --> 00:02:40.620 Krugman, Ben Bernanke, and just a massive timeline 00:02:40.620 --> 00:02:43.659 of... global data. It is a heavy stack, for sure. 00:02:43.780 --> 00:02:46.099 But the story it tells is absolutely fascinating. 00:02:46.439 --> 00:02:48.479 So let's start with a reality check on the timeline. 00:02:49.360 --> 00:02:52.060 Because the official dates of the recession are 00:02:52.060 --> 00:02:58.580 December 2007 to June 2009. June 2009. Honestly, 00:02:58.680 --> 00:03:01.060 that sounds ridiculous to me. I remember 2010. 00:03:01.439 --> 00:03:04.840 I remember 2011. People were losing homes. Friends 00:03:04.840 --> 00:03:07.620 were out of work for years. How can economists 00:03:07.620 --> 00:03:09.879 look at that carnage and say, yep, it's over? 00:03:10.509 --> 00:03:12.569 This is where we have to distinguish between 00:03:12.569 --> 00:03:16.129 the economy as a calculator sees it and the economy 00:03:16.129 --> 00:03:19.710 as, you know, human beings feel it. When economists 00:03:19.710 --> 00:03:22.189 declare a recession is over, they are using a 00:03:22.189 --> 00:03:25.830 very specific technical switch. Usually, a recession 00:03:25.830 --> 00:03:28.629 is defined as two consecutive quarters of GDP 00:03:28.629 --> 00:03:31.550 contraction. Basically, it's the pile of money 00:03:31.550 --> 00:03:33.710 the country makes getting smaller. Okay, so as 00:03:33.710 --> 00:03:36.330 long as the pile grows by even $1, the recession 00:03:36.330 --> 00:03:39.150 is technically over. Precisely. By that very 00:03:39.150 --> 00:03:41.469 narrow metric, the U .S. recession lasted 19 00:03:41.469 --> 00:03:44.509 months. But there's a second, broader definition 00:03:44.509 --> 00:03:47.009 of recession, which is just a period of reduced 00:03:47.009 --> 00:03:49.530 economic activity and hardship. Which feels a 00:03:49.530 --> 00:03:51.590 lot more real. It's the lived experience. And 00:03:51.590 --> 00:03:54.310 by that metric, the Great Recession dragged on 00:03:54.310 --> 00:03:56.449 for the better part of a decade. In fact, one 00:03:56.449 --> 00:03:58.430 of our sources, the journalist Robert Kuttner, 00:03:58.569 --> 00:04:00.650 argues that calling it the Great Recession is 00:04:00.650 --> 00:04:02.870 a complete misnomer. Really? What does he want 00:04:02.870 --> 00:04:05.250 to call it? He suggests the lesser depression 00:04:05.250 --> 00:04:08.430 or even the great deflation. Wow. His argument 00:04:08.430 --> 00:04:10.389 is that standard recessions are like a cold. 00:04:10.490 --> 00:04:12.909 You get sick, you rest, you bounce back pretty 00:04:12.909 --> 00:04:15.789 quickly. This was chronic. This was structural. 00:04:15.969 --> 00:04:18.149 It was a deflationary trap that we couldn't just 00:04:18.149 --> 00:04:20.889 grow our way out of. The lesser depression. Wow. 00:04:21.009 --> 00:04:24.470 Well, that sets the mood nicely. Yeah. But to 00:04:24.470 --> 00:04:27.889 understand why it was so bad, we have to look 00:04:27.889 --> 00:04:32.089 at the setup. Because in 2005 or 2006, The world 00:04:32.089 --> 00:04:34.350 seemed fine on the surface. It seemed great. 00:04:34.569 --> 00:04:36.990 Everyone was making money. House prices were 00:04:36.990 --> 00:04:39.610 going up. But underneath, there was this massive 00:04:39.610 --> 00:04:42.199 pressure building. And the concept that really 00:04:42.199 --> 00:04:44.519 blew my mind in the research was this idea of 00:04:44.519 --> 00:04:48.019 the giant pool of money. Ah, yes. This is a concept 00:04:48.019 --> 00:04:50.620 that was popularized by This American Life, but 00:04:50.620 --> 00:04:52.680 the data behind it is absolutely staggering. 00:04:53.000 --> 00:04:56.259 It describes the global savings glut. So if you 00:04:56.259 --> 00:04:58.079 look at the entire world, there's a certain amount 00:04:58.079 --> 00:05:00.120 of savings money that isn't being spent just 00:05:00.120 --> 00:05:02.439 sitting there waiting to be invested. In the 00:05:02.439 --> 00:05:05.120 year 2000, that global pool was about $35 trillion. 00:05:05.540 --> 00:05:08.920 Okay, $35 trillion. Hard to visualize, but let's 00:05:08.920 --> 00:05:11.939 say that's our baseline. 2008, just eight years 00:05:11.939 --> 00:05:15.420 later, that number had doubled to $70 trillion. 00:05:15.779 --> 00:05:19.439 Whoa, hold on. It doubled in eight years. That's 00:05:19.439 --> 00:05:21.319 not just growth. That's a complete explosion. 00:05:21.319 --> 00:05:25.259 Where does $35 trillion in new cash even come 00:05:25.259 --> 00:05:28.850 from so quickly? Did we print it? Some of it 00:05:28.850 --> 00:05:31.589 was credit creation, yes. But a huge chunk of 00:05:31.589 --> 00:05:34.089 it came from two specific places. First, you 00:05:34.089 --> 00:05:36.670 had the rapid industrialization of developing 00:05:36.670 --> 00:05:39.370 nations, specifically China. Right. The factory 00:05:39.370 --> 00:05:40.930 of the world. The factory of the world. They 00:05:40.930 --> 00:05:42.649 were making everything, banking the profits and 00:05:42.649 --> 00:05:44.730 saving it. Just incredibly high savings rates. 00:05:45.069 --> 00:05:47.990 Second, you had the oil -rich nations, Saudi 00:05:47.990 --> 00:05:50.990 Arabia, Abu Dhabi, Russia. Oil prices were skyrocketing 00:05:50.990 --> 00:05:53.149 during this period. So you have these massive 00:05:53.149 --> 00:05:55.509 piles of cash accumulating in Riyadh and Beijing. 00:05:56.040 --> 00:05:58.379 Okay, so China and Saudi Arabia are sitting on 00:05:58.379 --> 00:06:01.220 literal mountains of cash. Yeah. But I'm still 00:06:01.220 --> 00:06:03.259 not connecting the dots. Why does that crash 00:06:03.259 --> 00:06:05.199 the American housing market? Because that money 00:06:05.199 --> 00:06:07.560 has to go somewhere. I mean, if you are a sovereign 00:06:07.560 --> 00:06:10.120 wealth fund, you don't just stuff billions under 00:06:10.120 --> 00:06:11.980 a mattress. You need to invest it. You need a 00:06:11.980 --> 00:06:14.639 return. But, and this is the critical part, you 00:06:14.639 --> 00:06:16.800 want safety. You don't want to gamble it all 00:06:16.800 --> 00:06:20.279 on a startup. You want a safe, boring, predictable 00:06:20.279 --> 00:06:23.360 return. And historically, what is the safest 00:06:23.360 --> 00:06:26.220 investment in the entire world? U .S. government 00:06:26.220 --> 00:06:30.240 bonds. Treasuries. Exactly. But here's the problem. 00:06:30.839 --> 00:06:33.040 Because there was so much money flooding the 00:06:33.040 --> 00:06:37.079 system, that $70 trillion pool, the demand for 00:06:37.079 --> 00:06:39.160 U .S. treasuries was so high that the interest 00:06:39.160 --> 00:06:41.420 rate just plummeted. Basic supply and demand. 00:06:41.620 --> 00:06:43.259 Right. If everyone wants to lend you money, you 00:06:43.259 --> 00:06:45.459 don't have to pay them much interest. So these 00:06:45.459 --> 00:06:47.819 giant global investors started looking around. 00:06:47.899 --> 00:06:50.480 They said, we want a safe place to put our money, 00:06:50.579 --> 00:06:52.839 like the U .S., but we need a better return than 00:06:52.839 --> 00:06:55.600 1 or 2 percent. And Wall Street hears that and 00:06:55.600 --> 00:06:58.160 says, we have a product for you. Enter Wall Street. 00:06:58.480 --> 00:07:01.779 They see this massive captive customer base, 00:07:01.879 --> 00:07:04.560 this giant pool of money that is desperate for 00:07:04.560 --> 00:07:07.360 a product that is safe like a bond but pays like 00:07:07.360 --> 00:07:09.779 an investment. So they engineered the mortgage 00:07:09.779 --> 00:07:11.980 -backed security. Okay. We need to unpack this. 00:07:12.120 --> 00:07:13.920 Yeah. Because mortgage -backed security or MBS 00:07:13.920 --> 00:07:16.379 is one of those terms that just makes people's 00:07:16.379 --> 00:07:19.120 eyes glaze over. It does. But it's so central 00:07:19.120 --> 00:07:21.639 to the story. It is. So think of it this way. 00:07:22.160 --> 00:07:24.740 In the old days, right, you went to your local 00:07:24.740 --> 00:07:27.699 bank. You asked for a mortgage. The banker looked 00:07:27.699 --> 00:07:29.699 you in the eye. Maybe they knew your parents. 00:07:29.779 --> 00:07:31.680 They gave you the money. And then you paid that 00:07:31.680 --> 00:07:35.480 banker back for 30 years. The bank kept the mortgage 00:07:35.480 --> 00:07:37.899 on its books. Right. It's a relationship. There's 00:07:37.899 --> 00:07:40.560 accountability. Exactly. The bank cared if you 00:07:40.560 --> 00:07:44.379 paid it back. But in the 2000s, the system completely 00:07:44.379 --> 00:07:47.680 changed. The bank lends you the money, but they 00:07:47.680 --> 00:07:50.310 don't keep the mortgage. They sell it, sometimes 00:07:50.310 --> 00:07:53.189 within days, to Wall Street. Wall Street takes 00:07:53.189 --> 00:07:55.589 your mortgage, staples it together with thousands 00:07:55.589 --> 00:07:57.910 of other mortgages, some from Florida, some from 00:07:57.910 --> 00:08:00.649 California, some from Ohio, and turns that bundle 00:08:00.649 --> 00:08:03.850 into a bond. Then they sell slices of that bond 00:08:03.850 --> 00:08:06.290 to the giant pool of money. So the investors 00:08:06.290 --> 00:08:08.509 in China or Saudi Arabia aren't betting on me 00:08:08.509 --> 00:08:11.029 personally paying my mortgage. They're betting 00:08:11.029 --> 00:08:13.209 on thousands of Americans paying their mortgages 00:08:13.209 --> 00:08:16.279 all at once. Correct. And the theory, the big 00:08:16.279 --> 00:08:19.860 sales pitch was, look, maybe one guy defaults, 00:08:19.860 --> 00:08:23.000 maybe 10 guys default, but everyone won't default 00:08:23.000 --> 00:08:25.879 at the same time. The U .S. housing market has 00:08:25.879 --> 00:08:29.699 never, ever crashed nationwide. So the rating 00:08:29.699 --> 00:08:33.580 agencies, Moody's, S &P, slapped a triple A rating 00:08:33.580 --> 00:08:35.679 on these bonds. The highest rating you can get. 00:08:35.759 --> 00:08:38.100 The same rating as U .S. Treasuries. And the 00:08:38.100 --> 00:08:41.379 giant pool of money bought them up by the boatload. 00:08:41.440 --> 00:08:44.230 This created this insatiable demand. And because 00:08:44.230 --> 00:08:46.149 Wall Street could sell these mortgages as fast 00:08:46.149 --> 00:08:47.909 as they could make them, they just needed more 00:08:47.909 --> 00:08:49.809 and more mortgages. They needed more raw material 00:08:49.809 --> 00:08:52.029 for the machine. That's it. Exactly. This is 00:08:52.029 --> 00:08:54.330 the supply chain of the crisis. To make more 00:08:54.330 --> 00:08:56.509 bonds, you need more homebuyers. Eventually, 00:08:56.549 --> 00:08:58.529 you run out of people with good credit and a 00:08:58.529 --> 00:09:00.809 20 % down payment. So what do you do? You lower 00:09:00.809 --> 00:09:02.649 the standards. You lower the standards. You start 00:09:02.649 --> 00:09:04.990 lending to people with lower credit scores, the 00:09:04.990 --> 00:09:07.389 so -called subprime borrowers. You stop asking 00:09:07.389 --> 00:09:10.149 for proof of income. These are the infamous Anaya 00:09:10.149 --> 00:09:14.710 Angel loans. No income. No Job. I remember hearing 00:09:14.710 --> 00:09:17.429 about those. And I remember thinking, who on 00:09:17.429 --> 00:09:20.070 earth would lend money to someone with no job? 00:09:20.309 --> 00:09:23.029 But now it makes perfect sense. The person lending 00:09:23.029 --> 00:09:25.490 the money didn't care if it got paid back. Because 00:09:25.490 --> 00:09:27.289 they were just selling the loan to Wall Street 00:09:27.289 --> 00:09:31.049 five minutes later. Bingo. The risk was severed 00:09:31.049 --> 00:09:33.730 from the originator. The local mortgage broker 00:09:33.730 --> 00:09:36.450 got their fee and the hot potato was passed up 00:09:36.450 --> 00:09:39.570 the chain. And this brings us to the real engine 00:09:39.570 --> 00:09:42.779 room of the crisis. The shadow banking system. 00:09:43.000 --> 00:09:45.700 Right. The spy novel term. It sounds like loan 00:09:45.700 --> 00:09:47.840 sharks in a back alley, I know. It really does. 00:09:48.120 --> 00:09:50.220 But it's actually much more sophisticated and 00:09:50.220 --> 00:09:53.940 because of that, much more dangerous. To understand 00:09:53.940 --> 00:09:56.539 shadow banking, we first have to agree on what 00:09:56.539 --> 00:09:59.279 a real bank does. A normal bank like Wells Fargo 00:09:59.279 --> 00:10:01.440 or Bank of America. Okay. You put your money 00:10:01.440 --> 00:10:03.539 in a savings account. That money is short term. 00:10:03.620 --> 00:10:06.049 You can take it out whenever you want. The bank 00:10:06.049 --> 00:10:08.710 then lends that money out for a 30 year mortgage, 00:10:08.970 --> 00:10:11.950 which is long term. This basic function is called 00:10:11.950 --> 00:10:14.950 maturity transformation. It's inherently risky. 00:10:15.389 --> 00:10:17.409 Because if everyone wants their cash back today, 00:10:17.629 --> 00:10:20.049 the bank can't just call up all the homeowners 00:10:20.049 --> 00:10:22.529 and demand the mortgage back. Right. That's the 00:10:22.529 --> 00:10:24.769 classic run on the bank. It's a wonderful life. 00:10:25.070 --> 00:10:27.750 George Bailey panicking. The money's not here. 00:10:27.830 --> 00:10:30.970 It's in your house and your house. Exactly. So 00:10:30.970 --> 00:10:33.730 to prevent that, after the Great Depression, 00:10:33.990 --> 00:10:36.509 the government created deposit insurance, the 00:10:36.509 --> 00:10:40.330 FDIC. If the bank fails, the government pays 00:10:40.330 --> 00:10:42.610 you up to a certain limit. That keeps everyone 00:10:42.610 --> 00:10:45.409 calm and prevents panics. A crucial safety net. 00:10:45.529 --> 00:10:47.990 A crucial safety net. Now, shadow banking is 00:10:47.990 --> 00:10:50.210 doing the exact same thing, taking short -term 00:10:50.210 --> 00:10:52.710 cash and lending it long -term, but without the 00:10:52.710 --> 00:10:55.070 insurance and without the regulation. So give 00:10:55.070 --> 00:10:57.389 me a concrete example. How does a shadow bank 00:10:57.389 --> 00:11:00.230 work in practice? Who were these entities? The 00:11:00.230 --> 00:11:02.529 biggest players were the investment banks themselves. 00:11:02.950 --> 00:11:05.450 Lehman Brothers, Bear Stearns, Goldman Sachs. 00:11:05.509 --> 00:11:08.169 And the key mechanism was the repo market. Repo 00:11:08.169 --> 00:11:11.440 market. It's the engine of shadow banking. Imagine 00:11:11.440 --> 00:11:14.340 you are Lehman Brothers. You are holding billions 00:11:14.340 --> 00:11:16.019 of dollars in these mortgage bonds we talked 00:11:16.019 --> 00:11:17.659 about. You want to buy more. You don't have cash 00:11:17.659 --> 00:11:20.019 on hand, but you have these bonds as an asset. 00:11:20.240 --> 00:11:23.240 So you go to a money market fund, maybe a fund 00:11:23.240 --> 00:11:25.720 managing cash for General Electric or a giant 00:11:25.720 --> 00:11:28.340 pension fund, and you say, I will sell you this 00:11:28.340 --> 00:11:31.440 bond for $100 cash today, and I promise to buy 00:11:31.440 --> 00:11:34.779 it back tomorrow for $101. It's like a pawn shop. 00:11:34.860 --> 00:11:36.600 You're pointing your bonds overnight for cash. 00:11:36.860 --> 00:11:39.340 It is exactly a pawn shop for billionaires. It's 00:11:39.340 --> 00:11:42.279 a repurchase agreement. or repo. Lehman gets 00:11:42.279 --> 00:11:45.120 cash to play with for 24 hours. The money market 00:11:45.120 --> 00:11:47.700 fund gets a supposedly safe bond as collateral 00:11:47.700 --> 00:11:50.340 and makes a tiny bit of interest. They did this 00:11:50.340 --> 00:11:53.059 every single night with trillions of dollars. 00:11:53.159 --> 00:11:56.019 Trillions every night. Every single night. By 00:11:56.019 --> 00:11:58.519 early 2009, our sources show the shadow banking 00:11:58.519 --> 00:12:02.419 system had assets of roughly $62 trillion. For 00:12:02.419 --> 00:12:04.740 context, the entire traditional regulated banking 00:12:04.740 --> 00:12:08.000 system only had about $39 trillion in assets. 00:12:08.320 --> 00:12:10.960 So the unregulated system was significantly larger 00:12:10.960 --> 00:12:13.360 than the real banking system. Way bigger. So 00:12:13.360 --> 00:12:15.690 you have a system. Bigger than the actual banks, 00:12:15.809 --> 00:12:18.210 where money is being borrowed every single night 00:12:18.210 --> 00:12:20.929 to fund 30 -year mortgages, and there is absolutely 00:12:20.929 --> 00:12:25.029 no safety net. No FDIC. None. If that money market 00:12:25.029 --> 00:12:27.190 fund gets scared, if they suddenly think your 00:12:27.190 --> 00:12:30.009 collateral, that mortgage bond, is worthless, 00:12:30.309 --> 00:12:32.909 they just say no. They don't have to roll over 00:12:32.909 --> 00:12:35.129 the loan. They just don't renew the pawn ticket 00:12:35.129 --> 00:12:38.009 for the next day. And suddenly, Lehman Brothers 00:12:38.009 --> 00:12:40.159 has to come up with... billions of dollars in 00:12:40.159 --> 00:12:43.019 cash instantly to pay back yesterday's loan. 00:12:43.279 --> 00:12:46.399 If they can't, they're bankrupt instantly. It's 00:12:46.399 --> 00:12:48.480 terrifying. It's like building a 21st century 00:12:48.480 --> 00:12:51.179 financial skyscraper on a 19th century foundation. 00:12:51.559 --> 00:12:54.059 Or with no foundation at all. A 19th century 00:12:54.059 --> 00:12:56.039 lack of safeguards is a better way to put it. 00:12:56.100 --> 00:12:58.440 And that brings us to the trigger. We have the 00:12:58.440 --> 00:13:00.799 giant pool of money inflating the bubble. We 00:13:00.799 --> 00:13:02.980 have the shadow banking system amplifying the 00:13:02.980 --> 00:13:06.059 risk to an insane degree. Now, all we need is 00:13:06.059 --> 00:13:08.679 the pin. The housing market finally turns. It 00:13:08.679 --> 00:13:11.820 peaked in 2006. Alan Greenspan, the Fed chair, 00:13:12.019 --> 00:13:14.440 admitted in 2005 there was some froth in the 00:13:14.440 --> 00:13:16.759 market. The Economist was more blunt. They called 00:13:16.759 --> 00:13:20.120 it the biggest bubble in history. Froth is a 00:13:20.120 --> 00:13:22.840 bit of an understatement. just a bit prices got 00:13:22.840 --> 00:13:25.259 so high that people just couldn't afford to buy 00:13:25.259 --> 00:13:28.580 even with the craziest loans so prices started 00:13:28.580 --> 00:13:31.980 to drift down and this is where the ugly math 00:13:31.980 --> 00:13:35.059 of leverage absolutely kills you if you bought 00:13:35.059 --> 00:13:37.139 a half million dollar house with zero percent 00:13:37.139 --> 00:13:40.779 down and the price drops just five percent you 00:13:40.779 --> 00:13:43.120 are now twenty five thousand dollars under water 00:13:43.120 --> 00:13:45.919 you owe more than the house is worth And a lot 00:13:45.919 --> 00:13:47.700 of these loans had those teaser rates, right? 00:13:47.740 --> 00:13:49.539 They started low and then reset to something 00:13:49.539 --> 00:13:52.360 huge two or three years later. Yes, that was 00:13:52.360 --> 00:13:54.720 the whole model. So the plan for these borrowers 00:13:54.720 --> 00:13:57.259 was always, I'll just refinance in two years 00:13:57.259 --> 00:13:59.799 before the rate resets. But now the house is 00:13:59.799 --> 00:14:01.620 worth less than the loan. The bank won't let 00:14:01.620 --> 00:14:03.559 you refinance. Your payment suddenly triples. 00:14:03.620 --> 00:14:06.220 You can't pay. You default. And when those defaults 00:14:06.220 --> 00:14:08.879 started trickling in and then flooding in, those 00:14:08.879 --> 00:14:11.950 safe, triply bonds started to look, well. Not 00:14:11.950 --> 00:14:13.809 so safe anymore. I want to focus on the timeline 00:14:13.809 --> 00:14:15.850 of the panic here because we tend to think it 00:14:15.850 --> 00:14:18.730 all happened in one week in September 2008. But 00:14:18.730 --> 00:14:21.090 the tremor started way, way earlier. In August 00:14:21.090 --> 00:14:26.289 2007, a French bank, BNP Paribas, froze three 00:14:26.289 --> 00:14:28.649 of its investment funds because they said they 00:14:28.649 --> 00:14:31.669 couldn't value the subprime assets inside them. 00:14:31.850 --> 00:14:33.429 They couldn't even put a price on them. They 00:14:33.429 --> 00:14:35.330 couldn't price them. That was the first major 00:14:35.330 --> 00:14:37.090 tremor. That was the moment the smart money started 00:14:37.090 --> 00:14:39.649 to run. The repo market, that pawn shop we talked 00:14:39.649 --> 00:14:42.590 about, started to seize up. Lenders started saying, 00:14:42.629 --> 00:14:44.789 you know what? I don't want that mortgage bond 00:14:44.789 --> 00:14:47.450 as collateral. I don't trust it. Give me a treasury 00:14:47.450 --> 00:14:49.789 bond instead. And we actually saw a physical 00:14:49.789 --> 00:14:54.470 bank run in the UK, right? Northern Iraq. With 00:14:54.470 --> 00:14:57.409 the lines of people. September 2007. This was 00:14:57.409 --> 00:14:59.570 a jarring visual for the modern world. We had 00:14:59.570 --> 00:15:01.710 not seen lines of people queuing around the block 00:15:01.710 --> 00:15:05.409 to withdraw cash since the 1930s. Northern Rock 00:15:05.409 --> 00:15:07.889 was a bank that relied very heavily on that short 00:15:07.889 --> 00:15:10.509 -term wholesale funding, the shadow banking model. 00:15:10.649 --> 00:15:12.769 When the market froze, they couldn't fund their 00:15:12.769 --> 00:15:15.009 daily operations. But the U .S. system, it kind 00:15:15.009 --> 00:15:16.769 of kept limping along for another year after 00:15:16.769 --> 00:15:19.860 that. It did. Bear Stearns, a major investment 00:15:19.860 --> 00:15:22.559 bank, failed in March 2008 and was basically 00:15:22.559 --> 00:15:25.139 sold to J .P. Morgan for pennies on the dollar. 00:15:25.539 --> 00:15:28.600 The government, the Fed, helped broker that deal 00:15:28.600 --> 00:15:31.519 to prevent a wider panic. And everyone sort of 00:15:31.519 --> 00:15:33.019 breathed a sigh of relief. Everyone thought, 00:15:33.120 --> 00:15:35.460 OK, the worst is over. The government is managing 00:15:35.460 --> 00:15:37.600 it. They have a playbook. And then came September 00:15:37.600 --> 00:15:41.620 15, 2008. Lehman Brothers. The weekend that changed 00:15:41.620 --> 00:15:44.610 the world. The government, led by Treasury Secretary 00:15:44.610 --> 00:15:47.730 Hank Paulson and Fed Chair Ben Bernanke, tried 00:15:47.730 --> 00:15:50.490 desperately to find a buyer for Lehman. They 00:15:50.490 --> 00:15:53.289 couldn't. And they made the decision, or as they 00:15:53.289 --> 00:15:56.149 argued, felt they had no legal choice, to let 00:15:56.149 --> 00:15:58.730 it file for bankruptcy. Why was Lehman different? 00:15:58.830 --> 00:16:01.190 Why did letting Lehman go essentially push the 00:16:01.190 --> 00:16:03.809 global economy off a cliff when Bear Stearns 00:16:03.809 --> 00:16:06.190 didn't? Because it shattered the one remaining 00:16:06.190 --> 00:16:08.649 pillar of trust, the assumption that the government 00:16:08.649 --> 00:16:10.850 would always be the backstop for a major firm. 00:16:11.340 --> 00:16:13.960 It was called moral hazard, the idea that you 00:16:13.960 --> 00:16:16.679 shouldn't bail people out. But once Lehman went 00:16:16.679 --> 00:16:18.940 down, the market's belief in a safety net was 00:16:18.940 --> 00:16:21.700 gone. Panic went from linear to exponential. 00:16:22.039 --> 00:16:25.340 And this is where that obscure thing, the reserve 00:16:25.340 --> 00:16:28.019 primary fund, becomes the main character in the 00:16:28.019 --> 00:16:30.820 story, right? Yes. This is absolutely crucial 00:16:30.820 --> 00:16:33.559 to understanding the speed of the collapse. The 00:16:33.559 --> 00:16:35.899 reserve primary fund was a money market fund. 00:16:36.159 --> 00:16:39.649 It was supposed to be as safe as cash. For every 00:16:39.649 --> 00:16:41.990 dollar you put in, you always, always get a dollar 00:16:41.990 --> 00:16:45.210 out. It's where big corporations keep their payroll 00:16:45.210 --> 00:16:47.590 cash. OK, so it's supposed to be boring and safe. 00:16:47.750 --> 00:16:50.690 The safest. But they held a small amount of Lehman 00:16:50.690 --> 00:16:53.509 Brothers debt. When Lehman collapsed, that debt 00:16:53.509 --> 00:16:56.210 became worthless and the fund broke the buck. 00:16:56.389 --> 00:16:59.090 Explain that phrase, broke the buck. To a normal 00:16:59.090 --> 00:17:01.649 person, it sounds like losing a few cents. No 00:17:01.649 --> 00:17:03.950 big deal. It sounds trivial, but in the financial 00:17:03.950 --> 00:17:06.569 world, it's catastrophic. It's like finding out 00:17:06.569 --> 00:17:08.670 the ruler you use to measure a meter is actually 00:17:08.670 --> 00:17:11.470 only 97 centimeters long. It means the shares 00:17:11.470 --> 00:17:14.009 in this safe as cash fund were no longer worth 00:17:14.009 --> 00:17:17.910 $1. They were worth maybe 97 cents. This caused 00:17:17.910 --> 00:17:20.869 an immediate system wide run on every money market 00:17:20.869 --> 00:17:22.950 fund in America. Everyone tried to pull their 00:17:22.950 --> 00:17:25.750 cash out at once. Investors pulled $196 billion 00:17:25.750 --> 00:17:28.690 out in a single week. And if the money market 00:17:28.690 --> 00:17:31.650 funds empty out. Then the commercial paper market 00:17:31.650 --> 00:17:34.230 stops. And the commercial paper market is where 00:17:34.230 --> 00:17:37.410 General Electric, Ford, Toyota, even Verizon 00:17:37.410 --> 00:17:40.349 borrow money day to day to pay their workers 00:17:40.349 --> 00:17:43.089 and buy parts for their factories. So this isn't 00:17:43.089 --> 00:17:45.849 about stock prices anymore? No. This is about 00:17:45.849 --> 00:17:48.029 whether the biggest companies in the world can 00:17:48.029 --> 00:17:51.289 make payroll next Friday. We were days, maybe 00:17:51.289 --> 00:17:54.869 hours, away from ATM stopping and global supply 00:17:54.869 --> 00:17:57.630 chains completely freezing. It wasn't just a 00:17:57.630 --> 00:18:00.650 stock market crash. It was the entire circulatory 00:18:00.650 --> 00:18:03.470 system of the real economy stopping. And right 00:18:03.470 --> 00:18:07.140 in the eye of this hurricane sits AIG. Now, AIG 00:18:07.140 --> 00:18:09.019 is an insurance company. My parents have life 00:18:09.019 --> 00:18:11.140 insurance with them. Why are they at the dead 00:18:11.140 --> 00:18:13.400 center of a global banking collapse? Because 00:18:13.400 --> 00:18:15.740 of a little, barely regulated financial instrument 00:18:15.740 --> 00:18:19.019 called a credit default swap, or CDS. Okay, we 00:18:19.019 --> 00:18:20.720 need a good analogy here. I've heard it called 00:18:20.720 --> 00:18:23.299 fire insurance, but that feels too simple. The 00:18:23.299 --> 00:18:25.220 fire insurance analogy works, but let's modify 00:18:25.220 --> 00:18:27.140 it a bit to show the absolute insanity of the 00:18:27.140 --> 00:18:30.720 situation. Imagine you buy a house, you buy fire 00:18:30.720 --> 00:18:32.960 insurance on it. If it burns down, the insurance 00:18:32.960 --> 00:18:35.160 company pays you. Makes sense. Simple enough. 00:18:35.319 --> 00:18:38.240 Now, imagine that I, your neighbor, can also 00:18:38.240 --> 00:18:40.900 buy fire insurance on your house. And the person 00:18:40.900 --> 00:18:43.160 across the street can buy fire insurance on your 00:18:43.160 --> 00:18:45.900 house. In fact, everyone in the city can buy 00:18:45.900 --> 00:18:48.279 a policy betting that your house will burn down. 00:18:48.539 --> 00:18:50.940 Okay, so now there are hundreds of policies on 00:18:50.940 --> 00:18:54.019 my one house. So if my house catches fire? The 00:18:54.019 --> 00:18:55.819 insurance company doesn't just pay you for your 00:18:55.819 --> 00:18:58.420 loss. They have to pay everyone in the city who 00:18:58.420 --> 00:19:01.559 bet on your house burning. That is a credit default 00:19:01.559 --> 00:19:04.859 swap. Speculators were using these to bet that 00:19:04.859 --> 00:19:07.599 mortgage bonds would fail even if they didn't 00:19:07.599 --> 00:19:10.319 own the bonds. And AIG was the insurance company 00:19:10.319 --> 00:19:13.140 writing all these policies. AIG's financial products 00:19:13.140 --> 00:19:15.500 division, a little office in London, was writing 00:19:15.500 --> 00:19:17.720 these swaps by the tens of billions. They were 00:19:17.720 --> 00:19:19.859 just collecting the premiums free money, basically, 00:19:19.859 --> 00:19:22.720 because their computer model said a nationwide 00:19:22.720 --> 00:19:25.039 housing collapse has a zero percent probability. 00:19:25.799 --> 00:19:28.019 They were picking up nickels in front of a steamroller. 00:19:28.140 --> 00:19:30.359 And when Lehman failed and the housing market 00:19:30.359 --> 00:19:33.269 crashed for real, the steamroller hit them. They 00:19:33.269 --> 00:19:35.990 owed tens of billions of dollars in payouts essentially 00:19:35.990 --> 00:19:38.410 overnight. They didn't have the cash. And here 00:19:38.410 --> 00:19:40.410 is why the government panicked and had to step 00:19:40.410 --> 00:19:43.710 in. If AIG went bankrupt, they wouldn't be able 00:19:43.710 --> 00:19:45.490 to pay the banks on the other side of those bets. 00:19:45.769 --> 00:19:48.410 Goldman Sachs, Deutsche Bank, Societe Generale 00:19:48.410 --> 00:19:50.690 in France, they were all counterparties to AIG. 00:19:50.890 --> 00:19:54.250 If AIG failed, those giant global banks might 00:19:54.250 --> 00:19:57.609 fail too. So the bailout of AIG, which was over 00:19:57.609 --> 00:20:00.569 $100 billion of taxpayer money, wasn't really 00:20:00.569 --> 00:20:02.869 to save the insurance company. No. It was a pass 00:20:02.869 --> 00:20:05.349 through. The money went into AIG's front door 00:20:05.349 --> 00:20:08.650 and AIG immediately handed it out the back door 00:20:08.650 --> 00:20:10.690 to the global banks to settle these casino bets. 00:20:10.890 --> 00:20:13.089 It was a backdoor bailout of the entire global 00:20:13.089 --> 00:20:15.450 financial system. It makes my blood boil just 00:20:15.450 --> 00:20:17.589 hearing it retold. Yeah. And speaking of boiling 00:20:17.589 --> 00:20:19.849 blood, let's talk about the autopsy. The Financial 00:20:19.849 --> 00:20:22.849 Crisis Inquiry Commission, the FCIC. What did 00:20:22.849 --> 00:20:25.509 they actually conclude? Was this just a perfect 00:20:25.509 --> 00:20:27.849 storm that nobody could have possibly predicted? 00:20:28.170 --> 00:20:30.190 That is the excuse Wall Street loves to use. 00:20:30.329 --> 00:20:32.849 It was a 100 -year flood, an act of God. Nobody 00:20:32.849 --> 00:20:34.869 could have seen it, the FCIC majority report 00:20:34.869 --> 00:20:38.730 said. Nonsense. Their final verdict was that 00:20:38.730 --> 00:20:42.170 the crisis was avoidable. Avoidable. Yes. It 00:20:42.170 --> 00:20:45.410 was the result of human action. inaction and 00:20:45.410 --> 00:20:48.650 widespread failure. They cited massive failures 00:20:48.650 --> 00:20:51.390 in financial regulation, reckless corporate governance, 00:20:51.650 --> 00:20:54.609 excessive borrowing and just systemic breaches 00:20:54.609 --> 00:20:57.390 of ethics at all levels. But there were dissenting 00:20:57.390 --> 00:20:59.369 views in that report, right? I mean, I still 00:20:59.369 --> 00:21:01.609 hear people today saying it was the government's 00:21:01.609 --> 00:21:04.470 fault. Fannie Mae and Freddie Mac forced banks 00:21:04.470 --> 00:21:07.589 to lend to poor people. That is the primary dissenting 00:21:07.589 --> 00:21:09.930 narrative, and it came largely from the Republican 00:21:09.930 --> 00:21:13.069 members of the commission. They argued that government 00:21:13.069 --> 00:21:15.289 policies like the Community Reinvestment Act 00:21:15.289 --> 00:21:17.670 and affordable housing goals pushed banks into 00:21:17.670 --> 00:21:19.670 making bad loans they otherwise wouldn't have 00:21:19.670 --> 00:21:21.769 made. So is there any truth to that narrative? 00:21:22.029 --> 00:21:24.009 Well, there is a grain of truth in that U .S. 00:21:24.029 --> 00:21:27.069 housing policy for decades has encouraged homeownership. 00:21:27.269 --> 00:21:30.150 But as a primary cause of the crisis, the data 00:21:30.150 --> 00:21:32.630 shows it really falls apart under scrutiny. The 00:21:32.630 --> 00:21:35.210 FCIC majority and economists like Paul Krugman 00:21:35.210 --> 00:21:38.599 point. out a few smoking guns. First the real 00:21:38.599 --> 00:21:41.000 explosion in toxic subprime lending happened 00:21:41.000 --> 00:21:45.890 after 2004. What happened in 2004? The SEC relaxed 00:21:45.890 --> 00:21:48.450 capital rules for investment banks, allowing 00:21:48.450 --> 00:21:51.029 them to take on way more debt. It wasn't because 00:21:51.029 --> 00:21:53.569 of some new government housing mandate. OK. Second, 00:21:53.769 --> 00:21:56.509 the absolute worst of the loans, the ones with 00:21:56.509 --> 00:21:59.049 the highest default rates, were made by private 00:21:59.049 --> 00:22:02.089 lenders like Countrywide Financial, who weren't 00:22:02.089 --> 00:22:04.230 even subject to the Community Reinvestment Act. 00:22:04.450 --> 00:22:05.849 And then there's the biggest counter argument. 00:22:06.299 --> 00:22:08.680 Europe. Exactly. We had massive, even bigger 00:22:08.680 --> 00:22:11.059 housing bubbles in Spain, Ireland, and the U 00:22:11.059 --> 00:22:13.380 .K. Did the U .S. Community Reinvestment Act 00:22:13.380 --> 00:22:15.960 force Spanish banks to lend to construction companies 00:22:15.960 --> 00:22:19.240 in Madrid? Of course not. This was a global bubble 00:22:19.240 --> 00:22:22.079 fueled by cheap credit and deregulation, not 00:22:22.079 --> 00:22:24.160 a uniquely American government housing program. 00:22:24.460 --> 00:22:26.279 There is also another narrative about who was 00:22:26.279 --> 00:22:28.319 actually defaulting that I found really surprising 00:22:28.319 --> 00:22:30.259 in the source material. We have this popular 00:22:30.259 --> 00:22:32.859 image of the subprime borrower being a low -income 00:22:32.859 --> 00:22:35.759 family just trying to buy their first home. show 00:22:35.759 --> 00:22:38.349 something else entirely. Yes, this is narrative 00:22:38.349 --> 00:22:41.109 number five in our source material, the flippers. 00:22:41.589 --> 00:22:44.289 A really important study by the New York Fed 00:22:44.289 --> 00:22:46.809 showed that a huge percentage of the defaults, 00:22:46.809 --> 00:22:49.670 particularly in the hardest hit areas like Florida 00:22:49.670 --> 00:22:52.390 and Arizona, came from real estate investors. 00:22:52.890 --> 00:22:56.009 Speculators. Yes, people with good credit scores 00:22:56.009 --> 00:22:58.750 who were buying a second or a third or a fourth 00:22:58.750 --> 00:23:02.609 home purely to flip it for a profit a year later. 00:23:02.789 --> 00:23:05.589 So when prices started to drop. These weren't 00:23:05.589 --> 00:23:08.109 families losing. their only roof over their heads. 00:23:08.269 --> 00:23:09.950 These were investors looking at a spreadsheet, 00:23:10.250 --> 00:23:12.789 realizing the asset was underwater and making 00:23:12.789 --> 00:23:15.750 a cold, calculated business decision called a 00:23:15.750 --> 00:23:18.369 strategic default. They just walked away and 00:23:18.369 --> 00:23:20.890 mailed the keys to the bank. So the story that 00:23:20.890 --> 00:23:23.690 this was all caused by poor people borrowing 00:23:23.690 --> 00:23:26.670 too much is, well, it's largely imaginary history. 00:23:26.890 --> 00:23:28.990 It's a convenient narrative, but it's not supported 00:23:28.990 --> 00:23:31.049 by the facts. It was driven just as much, if 00:23:31.049 --> 00:23:33.069 not more, by the greedy middle and upper class 00:23:33.069 --> 00:23:35.329 chasing easy money in the bubble. I want to zoom 00:23:35.329 --> 00:23:37.829 out now. focused a lot on the U .S. mechanics, 00:23:37.990 --> 00:23:40.970 which were central. But this was the global financial 00:23:40.970 --> 00:23:43.670 crisis. Let's talk about the impact around the 00:23:43.670 --> 00:23:45.910 world, because some countries got absolutely 00:23:45.910 --> 00:23:50.069 hammered and some weirdly survived. The European 00:23:50.069 --> 00:23:53.309 experience was actually, in some ways, even worse 00:23:53.309 --> 00:23:55.730 and more prolonged than the American one. In 00:23:55.730 --> 00:23:57.750 the U .S., we had a banking and housing crisis. 00:23:58.009 --> 00:24:01.150 In Europe, it mutated into a full -blown sovereign 00:24:01.150 --> 00:24:04.309 debt crisis. Explain that mutation. How does 00:24:04.309 --> 00:24:06.569 a bad mortgage in Florida become a crisis for 00:24:06.569 --> 00:24:08.769 the entire government of Greece? It's all about 00:24:08.769 --> 00:24:11.309 Chepagian. European banks were holding a lot 00:24:11.309 --> 00:24:14.029 of those toxic U .S. mortgage assets. When those 00:24:14.029 --> 00:24:16.750 assets went bad, the banks started to fail. So 00:24:16.750 --> 00:24:19.250 European governments like Ireland's had to step 00:24:19.250 --> 00:24:21.250 in and bail them out. They took the private bank 00:24:21.250 --> 00:24:23.349 debt onto the public balance sheet. Exactly. 00:24:23.690 --> 00:24:26.869 That cost billions and billions of euros. Suddenly, 00:24:27.069 --> 00:24:29.630 countries like Ireland and Spain had these massive 00:24:29.630 --> 00:24:32.529 government debts. Investors looked at that and 00:24:32.529 --> 00:24:34.170 then they looked at countries that already had 00:24:34.170 --> 00:24:36.349 high debt, like Greece or Portugal, and they 00:24:36.349 --> 00:24:38.789 said, hang on. I don't think you can pay all 00:24:38.789 --> 00:24:41.450 this back. So they stopped lending to the countries 00:24:41.450 --> 00:24:44.230 themselves. And this led directly to the policy 00:24:44.230 --> 00:24:46.569 response that people still argue about today. 00:24:47.410 --> 00:24:50.140 Austerity. This is one of the great economic 00:24:50.140 --> 00:24:53.539 tragedies of the entire era. Around 2010, the 00:24:53.539 --> 00:24:56.059 global policy narrative shifted from simulate 00:24:56.059 --> 00:24:59.380 the economy to create jobs to cut government 00:24:59.380 --> 00:25:02.960 debt at all costs. The logic was we are broke. 00:25:03.079 --> 00:25:05.240 We need to tighten our belts. Which, you know, 00:25:05.279 --> 00:25:07.259 sounds like common sense. If I lose my job, I 00:25:07.259 --> 00:25:09.359 stop eating out. I cut my budget. That is the 00:25:09.359 --> 00:25:11.339 household fallacy, and it's a dangerous one. 00:25:11.799 --> 00:25:13.700 For a single household, that makes sense. But 00:25:13.700 --> 00:25:15.900 for a government, your spending is someone else's 00:25:15.900 --> 00:25:18.400 income. If the government cut spending during 00:25:18.400 --> 00:25:20.980 a massive recession, they fire workers, they 00:25:20.980 --> 00:25:23.180 cancel construction contracts, they cut benefits. 00:25:23.359 --> 00:25:26.019 Those people then have less money. So they spend 00:25:26.019 --> 00:25:29.460 less. The economy shrinks even more. And when 00:25:29.460 --> 00:25:32.039 the economy shrinks. What happens to tax revenue? 00:25:32.220 --> 00:25:34.920 It falls. It falls. So you cut spending to try 00:25:34.920 --> 00:25:37.299 and pay off your debt, but you accidentally crash 00:25:37.299 --> 00:25:39.920 your own revenue, which makes your debt to GDP 00:25:39.920 --> 00:25:42.440 ratio look even bigger. It's a death spiral. 00:25:42.640 --> 00:25:45.619 It's a complete death spiral. The IMF eventually 00:25:45.619 --> 00:25:48.680 admitted years later that they had massively 00:25:48.680 --> 00:25:51.619 underestimated the fiscal multiplier. They thought 00:25:51.619 --> 00:25:54.259 for every euro of cuts, the economy would shrink 00:25:54.259 --> 00:25:56.819 a little. It turned out for every euro of cuts, 00:25:56.940 --> 00:26:00.670 the economy shrank by 1 .50 euros or more. Greece 00:26:00.670 --> 00:26:04.609 lost 25 % of its GDP. That is Great Depression 00:26:04.609 --> 00:26:07.410 -level misery inflicted by policy choice. Now 00:26:07.410 --> 00:26:09.369 let's look at the survivors. Who made it out 00:26:09.369 --> 00:26:11.890 of this alive? Poland keeps coming up in the 00:26:11.890 --> 00:26:14.369 research as the star student of the crisis. Poland 00:26:14.369 --> 00:26:16.910 is fascinating. It's the only EU country that 00:26:16.910 --> 00:26:19.029 completely avoided a recession during the crisis. 00:26:19.150 --> 00:26:21.829 Not one single quarter of negative growth. Oh, 00:26:21.930 --> 00:26:26.789 are they wizards? No wizards. Just a combination 00:26:26.789 --> 00:26:29.650 of good structural advantages and a bit of luck. 00:26:30.140 --> 00:26:32.279 First, they didn't have a big credit boom before 00:26:32.279 --> 00:26:34.119 the crash, so their households and companies 00:26:34.119 --> 00:26:36.619 weren't drowning in debt. Second, and this is 00:26:36.619 --> 00:26:38.859 key, they have their own currency, the zloty. 00:26:39.059 --> 00:26:41.019 They aren't on the euro. They are not on the 00:26:41.019 --> 00:26:44.160 euro. Yeah. When the global crisis hit, the zloty 00:26:44.160 --> 00:26:47.059 lost value against other currencies. That sounds 00:26:47.059 --> 00:26:49.400 bad for the average person. Their savings are 00:26:49.400 --> 00:26:52.799 worth less. It is painful, yes. But it acts as 00:26:52.799 --> 00:26:55.900 a massive economic shock absorber. A cheaper 00:26:55.900 --> 00:26:58.420 currency makes your exports cheaper for the rest 00:26:58.420 --> 00:27:00.750 of the world. Suddenly, everyone wanted to buy 00:27:00.750 --> 00:27:03.009 Polish goods because they were on sale. It kept 00:27:03.009 --> 00:27:05.269 their factories running. So they could devalue 00:27:05.269 --> 00:27:08.069 their way to competitiveness. Exactly. Contrast 00:27:08.069 --> 00:27:10.609 that with Greece or Spain. They used the euro. 00:27:10.750 --> 00:27:13.349 They couldn't devalue their currency. The only 00:27:13.349 --> 00:27:15.329 way they could become more competitive was through 00:27:15.329 --> 00:27:17.930 internal devaluation, which means slashing wages 00:27:17.930 --> 00:27:20.650 and firing people. A much, much more painful 00:27:20.650 --> 00:27:23.849 path. OK, so having your own currency saved them. 00:27:23.930 --> 00:27:26.009 What about Australia? I've heard they dodged 00:27:26.009 --> 00:27:28.569 it, too. Australia avoided a technical recession 00:27:28.569 --> 00:27:31.430 completely. They call themselves the lucky country. 00:27:31.589 --> 00:27:35.230 And in 2008, their luck was geography. They are 00:27:35.230 --> 00:27:37.009 right next door to China. And China is the elephant 00:27:37.009 --> 00:27:38.970 in the room. We haven't discussed enough. While 00:27:38.970 --> 00:27:41.390 the entire Western world was imploding, what 00:27:41.390 --> 00:27:43.589 was China doing? China looked at the global collapse 00:27:43.589 --> 00:27:46.720 and essentially said. Not on our watch. They 00:27:46.720 --> 00:27:49.160 unleashed a government stimulus package that 00:27:49.160 --> 00:27:52.220 was on a relative scale staggering. Five hundred 00:27:52.220 --> 00:27:54.980 and eighty six billion dollars. That was about 00:27:54.980 --> 00:27:57.980 16 percent of their entire GDP at the time. 16 00:27:57.980 --> 00:28:01.029 percent. The U .S. stimulus was big. But it was 00:28:01.029 --> 00:28:03.769 nowhere near 16 % of GDP. Not even close. It 00:28:03.769 --> 00:28:07.150 was maybe 5 % or 6%. China basically poured concrete 00:28:07.150 --> 00:28:08.970 over the problem. They built high -speed rail, 00:28:09.130 --> 00:28:12.029 entire new cities, airports, roads. To do all 00:28:12.029 --> 00:28:13.970 that construction, they needed vast amounts of 00:28:13.970 --> 00:28:17.029 steel, iron ore, copper, and energy. And where 00:28:17.029 --> 00:28:18.750 does all that stuff come from? Where does iron 00:28:18.750 --> 00:28:20.569 ore come from? Australia. Where does copper come 00:28:20.569 --> 00:28:22.990 from? Chile. Where does soy come from to feed 00:28:22.990 --> 00:28:25.910 the workers? Brazil. So China's massive stimulus 00:28:25.910 --> 00:28:28.529 essentially put the entire global commodity economy 00:28:28.529 --> 00:28:31.589 on its back. and carried it for two years. They 00:28:31.589 --> 00:28:34.369 did. Their relentless demand kept the commodity 00:28:34.369 --> 00:28:37.470 -producing countries afloat. If China hadn't 00:28:37.470 --> 00:28:39.470 done that stimulus, the Great Recession would 00:28:39.470 --> 00:28:41.410 have almost certainly become a full -blown global 00:28:41.410 --> 00:28:44.369 depression. There's no question about it. Let's 00:28:44.369 --> 00:28:46.609 pivot back to the U .S. response and the controversy 00:28:46.609 --> 00:28:49.750 around it. We had TARP, the Troubled Asset Relief 00:28:49.750 --> 00:28:54.710 Program, the bank bailout, $700 billion. People 00:28:54.710 --> 00:28:57.190 were furious. They are still furious about it. 00:28:57.289 --> 00:29:00.519 The anger was visceral. And understandable. You 00:29:00.519 --> 00:29:02.880 had families losing their homes, their life savings, 00:29:03.000 --> 00:29:05.299 and the guys who literally built the bomb were 00:29:05.299 --> 00:29:07.299 getting golden parachutes funded by taxpayer 00:29:07.299 --> 00:29:10.319 money. It felt like a massive betrayal. But here 00:29:10.319 --> 00:29:12.180 is a fact from the reports that drives people 00:29:12.180 --> 00:29:14.119 crazy, even though it's true. The government 00:29:14.119 --> 00:29:16.500 actually made a profit on the bank bailouts. 00:29:16.759 --> 00:29:19.339 Wait, really? We made money on TARP. We did. 00:29:19.500 --> 00:29:21.359 The Treasury didn't just give the money away. 00:29:21.460 --> 00:29:23.220 They lent it, they charged interest, and they 00:29:23.220 --> 00:29:25.440 took equity warrants in the banks. When the banks 00:29:25.440 --> 00:29:27.359 recovered and their stock prices went up, they 00:29:27.359 --> 00:29:29.420 paid it all back with interest. The government 00:29:29.420 --> 00:29:32.099 recorded a net profit of roughly $87 billion 00:29:32.099 --> 00:29:35.539 on the core banking programs. So on a spreadsheet, 00:29:35.799 --> 00:29:38.720 it was a wild success. We stopped the collapse 00:29:38.720 --> 00:29:40.960 and made a profit for the taxpayer. Strictly 00:29:40.960 --> 00:29:43.759 financially, yes. But you cannot measure the 00:29:43.759 --> 00:29:46.660 social and political cost in dollars. The message 00:29:46.660 --> 00:29:49.200 it sent to the public was, if you are big enough 00:29:49.200 --> 00:29:51.640 and rich enough to threaten the system, the government 00:29:51.640 --> 00:29:54.160 will save you from your own mistakes. If you 00:29:54.160 --> 00:29:56.480 are a regular person who lost their home, you're 00:29:56.480 --> 00:29:59.619 on your own. That shattered the social contract. 00:29:59.940 --> 00:30:02.079 And besides the bailout, we also had the stimulus 00:30:02.079 --> 00:30:06.500 bill, the ARRA. About $800 billion for things 00:30:06.500 --> 00:30:09.140 like infrastructure and tax cuts. Was it enough? 00:30:09.359 --> 00:30:12.740 Most economists looking back now say no, it wasn't 00:30:12.740 --> 00:30:15.420 nearly enough. Paul Krugman was screaming at 00:30:15.420 --> 00:30:17.440 the time that it needed to be double that size 00:30:17.440 --> 00:30:20.000 to be effective. Why wasn't it? The big problem 00:30:20.000 --> 00:30:22.059 was while the federal government was trying to 00:30:22.059 --> 00:30:24.839 pump gas into the economy, state and local governments 00:30:24.839 --> 00:30:27.799 were slamming on the brakes. States, unlike the 00:30:27.799 --> 00:30:30.039 feds, have to balance their budgets every year. 00:30:30.349 --> 00:30:32.430 So with their tax revenues collapsing, they were 00:30:32.430 --> 00:30:34.789 firing teachers, police officers, and firefighters 00:30:34.789 --> 00:30:37.210 by the thousands. So the federal stimulus was 00:30:37.210 --> 00:30:39.170 just filling the hole left by the state cuts. 00:30:39.349 --> 00:30:41.630 It basically just offset the austerity at the 00:30:41.630 --> 00:30:44.130 state level. It prevented a depression, which 00:30:44.130 --> 00:30:46.549 is a huge achievement, but it wasn't big enough 00:30:46.549 --> 00:30:49.170 to launch a quick, robust recovery. And then 00:30:49.170 --> 00:30:52.369 there was the Fed. Ben Bernanke. He cut interest 00:30:52.369 --> 00:30:55.349 rates to zero. And when that didn't work, he 00:30:55.349 --> 00:30:58.309 started this experimental policy. Quantitative 00:30:58.309 --> 00:31:01.670 easing. This was the great experiment of the 00:31:01.670 --> 00:31:04.269 crisis. The Fed creates money electronically, 00:31:04.710 --> 00:31:08.069 literally types zeros into a computer and uses 00:31:08.069 --> 00:31:10.950 that new money to buy government bonds and mortgage 00:31:10.950 --> 00:31:13.009 backed securities from the banks. They were buying 00:31:13.009 --> 00:31:16.069 $85 billion worth a month at the peak. And the 00:31:16.069 --> 00:31:18.589 goal of that was what? To just flood the system 00:31:18.589 --> 00:31:21.380 with cash. The goal was to force long term interest 00:31:21.380 --> 00:31:24.259 rates down across the entire economy and crucially 00:31:24.259 --> 00:31:27.319 to force investors to buy riskier assets. If 00:31:27.319 --> 00:31:29.460 the Fed is buying all the safe bonds, investors 00:31:29.460 --> 00:31:31.859 have to go buy stocks and corporate bonds instead, 00:31:32.019 --> 00:31:34.140 which pushes up their prices. And it worked right. 00:31:34.259 --> 00:31:36.799 The stock market bottomed in March 2009 and then 00:31:36.799 --> 00:31:38.640 went on one of the longest bull runs in history. 00:31:38.759 --> 00:31:40.779 It works spectacularly well for asset prices. 00:31:41.079 --> 00:31:44.160 But here is the fundamental rub. Who owns assets? 00:31:44.400 --> 00:31:47.569 Rich people. The wealthy. Exactly. The top 10 00:31:47.569 --> 00:31:50.109 percent of Americans on something like 89 percent 00:31:50.109 --> 00:31:53.049 of all stocks. The bottom 50 percent own almost 00:31:53.049 --> 00:31:56.109 none. So the main policy tool that saved the 00:31:56.109 --> 00:31:58.430 economy worked by inflating the wealth of the 00:31:58.430 --> 00:32:01.230 people who already had wealth. This is why we 00:32:01.230 --> 00:32:04.509 saw such a pronounced K -shaped recovery. The 00:32:04.509 --> 00:32:06.769 top of the K went straight up while the bottom 00:32:06.769 --> 00:32:09.289 of the K stayed flat or went down. And this brings 00:32:09.289 --> 00:32:12.029 us to the legacy. the long tail of this crisis. 00:32:12.150 --> 00:32:14.430 Because you can't have a financial earthquake 00:32:14.430 --> 00:32:17.849 this big without massive political tsunamis following 00:32:17.849 --> 00:32:20.779 in its wake. You can draw a direct bright red 00:32:20.779 --> 00:32:23.799 line from the chaos of 2008 and the policy responses 00:32:23.799 --> 00:32:26.660 to it to the political instability and polarization 00:32:26.660 --> 00:32:28.759 we are living with today. Let's trace that line. 00:32:28.940 --> 00:32:31.380 Okay. In the U .S., the immediate anger at the 00:32:31.380 --> 00:32:33.319 bailouts and the stimulus burst the Tea Party 00:32:33.319 --> 00:32:35.500 movement on the right. They were furious about 00:32:35.500 --> 00:32:37.539 government spending and what they saw as crony 00:32:37.539 --> 00:32:39.900 capitalism. And on the left? On the left, a couple 00:32:39.900 --> 00:32:41.700 of years later, you had Occupy Wall Street. Their 00:32:41.700 --> 00:32:44.660 slogan was, we are the 99%. Different ideologies, 00:32:44.660 --> 00:32:46.460 different solutions, but the same underlying 00:32:46.460 --> 00:32:50.329 rage. The system is rigged. Precisely. And that 00:32:50.329 --> 00:32:52.410 rage doesn't just go away when the stock market 00:32:52.410 --> 00:32:54.849 recovers. It festers. Political scientists have 00:32:54.849 --> 00:32:57.210 shown that major financial crises often lead 00:32:57.210 --> 00:32:59.690 to a significant rise in populism about five 00:32:59.690 --> 00:33:01.690 to 10 years later. And just look at the timeline. 00:33:01.890 --> 00:33:05.630 The crisis is in 2008. By 2016, you have the 00:33:05.630 --> 00:33:07.509 rise of Bernie Sanders on the left and Donald 00:33:07.509 --> 00:33:10.089 Trump on the right. Both running as anti -establishment 00:33:10.089 --> 00:33:13.119 outsiders, attacking the status quo. Both tapping 00:33:13.119 --> 00:33:15.339 into that deep seated feeling that the experts 00:33:15.339 --> 00:33:17.839 in Washington and on Wall Street had failed the 00:33:17.839 --> 00:33:20.299 working class. Trump appealed directly to the 00:33:20.299 --> 00:33:23.039 forgotten man, the people in the parts of the 00:33:23.039 --> 00:33:24.880 country that were left behind by that K -shaped 00:33:24.880 --> 00:33:26.980 recovery. And we saw the same dynamic play out 00:33:26.980 --> 00:33:29.859 in Europe, too. with Brexit. Absolutely. The 00:33:29.859 --> 00:33:32.839 UK suffered massively from years of austerity 00:33:32.839 --> 00:33:35.759 after the crisis. Yeah. Real wages were stagnant 00:33:35.759 --> 00:33:38.119 for a decade when the Brexit vote came in 2016. 00:33:38.440 --> 00:33:40.740 For many people, it was largely a vote of no 00:33:40.740 --> 00:33:42.880 confidence in the entire establishment. It was 00:33:42.880 --> 00:33:45.319 the experts in London say Brexit will be bad 00:33:45.319 --> 00:33:47.900 for the economy. Well, the same experts said 00:33:47.900 --> 00:33:50.500 the economy was fine in 2007. Why should we ever 00:33:50.500 --> 00:33:52.619 trust them again? The sources also mentioned 00:33:52.619 --> 00:33:56.119 this darker trend of democratic backsliding. 00:33:56.140 --> 00:33:58.990 Yeah. This is the really chilling part. The data 00:33:58.990 --> 00:34:01.650 shows that in times of extreme economic fear 00:34:01.650 --> 00:34:04.190 and insecurity, people often become more receptive 00:34:04.190 --> 00:34:06.970 to strongman leaders and authoritarian politics. 00:34:07.289 --> 00:34:10.150 We saw significant shifts toward authoritarianism 00:34:10.150 --> 00:34:13.250 in places like Hungary, in Turkey and a consolidation 00:34:13.250 --> 00:34:16.210 of power in Russia. When democracy doesn't seem 00:34:16.210 --> 00:34:18.449 to be delivering prosperity, people start to 00:34:18.449 --> 00:34:21.349 question if democracy itself is worth it. That 00:34:21.349 --> 00:34:23.650 is a chilling thought. So as we wrap up this 00:34:23.650 --> 00:34:25.610 autopsy, let's try to synthesize the whole thing. 00:34:25.730 --> 00:34:28.030 We had a shadow banking system that was a ticking 00:34:28.030 --> 00:34:31.210 time bomb. We had a housing bubble fueled by 00:34:31.210 --> 00:34:34.829 this giant pool of global cash. And we had regulators 00:34:34.829 --> 00:34:37.030 who were either captured by the industry or just 00:34:37.030 --> 00:34:39.170 asleep at the wheel. And we responded by fixing 00:34:39.170 --> 00:34:41.309 the banks. We patched the plumbing of the financial 00:34:41.309 --> 00:34:44.050 system. But we largely left the homeowners, the 00:34:44.050 --> 00:34:46.429 actual people, underwater. So here's the final 00:34:46.429 --> 00:34:47.829 provocative thought I want to leave everyone 00:34:47.829 --> 00:34:50.449 with. We keep asking the question, could it happen 00:34:50.449 --> 00:34:52.920 again? And the banks and regulators always tell 00:34:52.920 --> 00:34:54.800 us, no, we have much higher capital requirements 00:34:54.800 --> 00:34:57.800 now. We are safe. And they're right in a narrow 00:34:57.800 --> 00:35:01.019 sense. The big banks are safer. JP Morgan is 00:35:01.019 --> 00:35:04.219 a fortress now. But remember. The shadow banking 00:35:04.219 --> 00:35:06.559 system. The pawn shop for billionaires. It didn't 00:35:06.559 --> 00:35:09.380 go away. It just changed shape. It moved. Now 00:35:09.380 --> 00:35:12.599 we have a massive private credit market. We have 00:35:12.599 --> 00:35:15.300 non -bank lenders that originate more mortgages 00:35:15.300 --> 00:35:18.400 than the actual banks do. We have crypto, which 00:35:18.400 --> 00:35:21.119 is essentially a shadow banking system on steroids, 00:35:21.480 --> 00:35:24.639 completely unregulated, highly leveraged, and 00:35:24.639 --> 00:35:27.579 prone to bank runs. So we locked and bolted the 00:35:27.579 --> 00:35:29.539 front door of the house, but we left the back 00:35:29.539 --> 00:35:32.219 window wide open. And the fundamental inequality 00:35:32.219 --> 00:35:34.619 that drove the debt bubble in the first place, 00:35:34.659 --> 00:35:36.860 the fact that for decades people's wages were 00:35:36.860 --> 00:35:38.960 flat so they had to borrow more and more to maintain 00:35:38.960 --> 00:35:41.099 their standard of living, that is worse today 00:35:41.099 --> 00:35:43.880 than it was in 2007. So the final question is, 00:35:43.940 --> 00:35:46.820 did we actually fix the car or did we just patch 00:35:46.820 --> 00:35:49.199 the tire while it's still speeding down the highway 00:35:49.199 --> 00:35:51.019 with a faulty engine? I think we all know the 00:35:51.019 --> 00:35:53.500 answer we are afraid of. Something to chew on 00:35:53.500 --> 00:35:55.860 the next time you see a headline about record 00:35:55.860 --> 00:35:59.510 stock market highs. That's it for this deep dive 00:35:59.510 --> 00:36:01.510 into the Great Recession. Thanks for listening.