Welcome back to the deep dive. We are really
glad you're here because today we are tackling
a beast. And I do not use that word lightly.
It is a massive beast. We are looking at a stack
of notes and research here that tells the story
of what is, I mean, effectively the mother of
all bubbles. That's probably the best way to
put it. We are talking about an event that didn't
just change the skyline of America literally,
but it. completely completely rewire the global
economy and it's a story that I think a lot of
people feel like they know but you know they
usually only know the ending right they know
the crash they know the movie the big short you
know 2008 was a very bad year to be a banker
or you know a homeowner exactly but for the deep
dive today our mission is different we aren't
just looking at the car crash we want to understand
the mechanic who you know Cut the brake lines.
We want to understand the rise. The buildup.
The buildup. Because before all the panic, there
was this long, seductive, really intoxicating
period where it felt like the laws of physics
just stopped applying to real estate. The delusion
phase. The delusion. And today we are going to
unpack how that delusion was built brick by brick.
We're going to look at the data that proved housing
had completely decoupled from reality. Okay.
The specific people who saw it coming. They were
totally ignored. And the deniers who just kept
the party going until the lights went out. And
we're basing this on a deep, deep analysis of
the Wikipedia entry for the 2000s United States
housing bubble. And we've got contemporary debates,
economic timelines, all the stuff on the subprime
mortgage collapse. It is a lot to get through.
It is. Yeah. But to really get it. You have to
sort of transport yourself back. You have to
go back to the thoroughly to mid 2000s. OK, I'm
there. Low rise jeans, flip phones are everywhere.
What's the economic vibe? The vibe is what economists
call irrational exuberance. You have to remember,
everywhere you looked, there was construction,
just cranes in the sky. Right. And there was
this pervasive cultural belief. I mean, it was
almost a religious belief that home prices only
go up. It was the ultimate cocktail party conversation,
wasn't it? It was. It absolutely was. If you
weren't flipping a condo, you were losing out.
It wasn't just a place to live. It was a sure
thing. A guaranteed win. A winning lottery ticket
that you could sleep inside. Yeah. It was perfect.
But here is the question I have. Looking at all
the data we have today, was it really that historic?
I mean, real estate always booms and busts. Was
this one actually special or are we just being
dramatic? No, no. It was completely anomalous.
It broke the charts. Oh, so? Well, to answer
that, we really have to look at the work of Robert
Schiller. The irrational exuberance guy. The
very same. He literally wrote the book on bubbles.
And he did something really simple but revolutionary.
He plotted U .S. home prices going all the way
back to 1890, over 100 years of data. OK, so
we have a century of housing prices. That's a
pretty good baseline. A great baseline. And he
adjusted it for inflation because obviously a
house in 1890 cost, what, $3 ,000? Now it costs
$300 ,000. But that's mostly just the dollar
losing value over time. Right. He wanted to know
the real value growth. So if you strip out inflation,
how much does a house actually go up in value
per year? Like, what's the magic number? From
1890. All the way to 2004. Yeah. 0 .4 % per year.
Wait. 0 .4? Not 4 %? 0 .4%. Less than half a
percent. That just doesn't feel right. I mean,
my parents bought a house in the 80s, and they
sold it for way, way more than they paid. That
feels like it has to be more than 0 .4%. And
that is the trap. See, your parents' house went
up in nominal dollars, but did it beat inflation
by some massive margin? Probably not. Okay. Think
about it this way. Houses get old. Roofs leak.
Pipes burst. Styles change. The physical structure
actually depreciates, kind of like a car. Right.
The wood rots. The carpet gets gross. The avocado
green kitchen goes out of style. Exactly. The
land underneath it might get more valuable, sure,
but the house itself is a decaying asset. So
historically, housing is a store of value. It's
like a savings account that keeps up with inflation.
It is not a rocket ship to wealth. Yeah. Okay.
So the historical reality is 0 .4 % growth. That's
the anchor. But what was the perception in the
2000s? What did people think was happening? Well,
Schiller did a survey to find out. He looked
at the period from 1940 to 2004. He asked recent
homebuyers, how much do you think your home is
increasing in value every year? And what did
they say? The average answer for that whole period,
the self -assessed value, was around 2 % per
year above inflation. Yeah. But by the time you
get to 2004 instead of 2005, people were expecting
10%, 15 % annual gains. Indefinitely. So the
gap between the reality of 0 .4 % and the wild
expectation of 15%, that's the bubble. That is
the chasm where the entire economy fell in. I
mean, people were borrowing money based on a
sort of fantasy trajectory. They were spending
future wealth that didn't actually exist. And
when did that trajectory finally hit the wall?
Because I think we all just used 2008 as the
shorthand, but the sources we have suggest the
peak was way earlier than that. Much earlier.
The peak of the madness, the absolute top of
the price chart was early 2006. 2006. So for
two whole years, the market was actually falling
before the big crash that everyone remembers.
Exactly. It wasn't a sudden explosion. It was
a slow hiss. The air started coming out of the
balloon in 2006 and 2007. Prices were ticking
down month after month. But the panic didn't
set in until the financial systems themselves
started to break later on. And do we have a specific
date for like the worst of it, the moment of
maximum pain in the numbers? December 30, 2008.
That's when the Case -Shiller Home Price Index
reported the single largest price drop in its
history. But even then, it wasn't over. Prices
kept grinding downward, finding new lows all
the way until 2011. That is such a long hangover.
Five years of just falling prices. Is it a brutal,
slow grinding process? Yeah, I want to zoom in
on the map for a second. Because there is this
idea that the entire United States went crazy.
Was every single house in America suddenly worth
double? No. And this is a really, really important
nuance. The bubble was widespread. I mean, it
affected more than half the states. But the intensity
was totally different depending on where you
lived. Right. We talk about the sand states.
Sand states. California, Florida, Arizona, Nevada.
The places with sun and sand. Okay, that makes
sense. If you look at cities like Miami, Las
Vegas, Phoenix, San Diego, and you can throw
D .C. in there too, these places saw absolute
mania. We're talking appreciation of over 80
% in a very short window of time. 80 %? That's
nearly doubling your money just for owning a
house for a few years. It was completely unsustainable.
But then you look at the middle of the country.
Look at the Rust Belt. You know, Cleveland, Detroit,
or even places like Dallas and Denver. Did they
boom too? Hardly at all. In the same period where
Miami is up 80%, places like Cleveland or Dallas
saw less than 10 % growth. See, they missed the
party. They missed the champagne, yes. But, and
here is the really cruel twist, they did not
miss the hangover. What do you mean by that?
If their prices didn't spike, why would they
crash? Because the crash wasn't just about prices
resetting to normal. It was about the whole economy
breaking. When the bubble burst in 2008, it took
the banking system with it. Credit froze up.
Jobs just evaporated. So if you're in Detroit.
If you are in Detroit and the auto industry collapses
because of this global recession, you lose your
job. You can't pay your mortgage. It doesn't
matter that your house didn't double in value.
You still get foreclosed on. That seems incredibly
unfair. It is. The sources show that places with
already weak local economies like Detroit actually
suffered remarkably high foreclosure rates, even
though they never had that bubble appreciation.
The worst of both worlds. They got the worst
of both worlds. Yeah. Exactly. Wow. OK, so we
have the what prices completely decoupled from
a century of history, mostly in these sand states.
but eventually dragging everyone down. Now, I
really want to get to the how. The mechanics.
Yes. How did we get here? Because it can't just
be that everyone woke up one day and decided
to overpay for condos. There had to be fuel on
the fire. There was a lot of fuel. Yeah. The
sources lay out a perfect storm scenario. It
wasn't one thing. It was four or five massive
catalysts hitting at the exact same time. Walk
me through them. What's number one? First, you
have tax policy. Okay, this is the stuff that
usually puts people to sleep, but I have a feeling
it's really important here. Crucially important.
In 1997, the Taxpayer Relief Act was passed.
And it did something huge. It exempted a massive
amount of profit from selling your home from
capital gains taxes. Specifically, $500 ,000
for a married couple. So if I buy a stock and
I make $100 ,000, I pay taxes. If I buy a house
and make $100 ,000. You likely pay zero tax on
that gain. So the government is basically incentivizing
me to put my money in a house rather than the
stock market. Exactly. It makes housing a tax
privileged investment. So that's ingredient one.
Ingredient two, interest rates were at historic
lows. Money was cheap. Money was cheap, which
means you can borrow more. The Federal Reserve.
Under Alan Greenspan, kept rates very low to
stimulate the economy after 9 -11 and the dot
-com crash. Okay, ingredient three. Lax lending
standards. This is the rise of subprime. We hear
that word subprime thrown around constantly.
What does it actually mean in this context? So
think of prime as a borrower with good credit,
a steady job, and a down payment. A safe bet.
Subprime is a borrower who might have bad credit,
no down payment, or irregular income. And traditionally,
banks wouldn't lend to them. Right. Or they would
charge them a huge interest rate to compensate
for the risk. But in the 2000s, standards just
like they collapsed. We started seeing ninja
loans. And NNJE, like a guy in a mask. No, an
INJA, no income, no job or assets. Wait, wait,
they were giving loans to people without even
verifying if they had a job? Exactly. Or they'd
accept stated income where you just write down
what you make and they don't check it. Because
the assumption was, even if you can't pay, the
house value will go up, so we can just sell the
house and get our money back. The house was the
collateral. That is just wild. And the fourth
ingredient connects back to that dot -com bubble
we mentioned. The late 90s tech boom. Yes. Think
about the psychology of the country. The dot
-com bubble bursts around 2000, 2001. People
get slaughtered in the stock market. They watch
their retirement accounts just vanish in pets
.com or whatever. They're burned. They don't
trust a Wall Street. Right. So where does all
that capital go? It needs a safe harbor. And
there is an old saying, right? Safe as houses.
Money fled the stock market and poured into real
estate. Robert Shiller actually wrote an article
for Barron's in 2005 called The Bubble's New
Home. That's a great title. It's perfect. He
argued that the emotional energy, that speculative
mania that was in tech stocks, didn't just disappear.
It migrated. The bubble changed its address from
Silicon Valley to the suburbs. So people started
trading houses like they used to trade tech stocks.
Exactly. But there is a physical reality to houses
that stocks don't have. And this leads to a really
surprising nuance in the data about what exactly
got so expensive. I remember reading this in
the notes. It's the whole land versus structure
thing. Right. When you buy a house, you are buying
two things. You are buying a pile of wood and
bricks, the structure. Yeah. And you're buying
the patch of earth that sits on the land. OK,
that's simple enough. The cost to build the structure,
you know, the lumber, the labor that goes up
with inflation, maybe a little more. But it didn't
triple in five years. Right. The source material
highlights that in those high -priced markets
like San Francisco or Miami, the land value reached
85 % of the total house value. 85%. So if I buy
a million -dollar house, I'm paying $850 ,000
for the dirt. You're paying for the location.
You're paying for the scarcity. Because, you
know, God isn't making any more land in San Francisco.
So why does that matter for the bubble? Because
land is purely speculative. You can't reproduce
it. If everyone decides the land is worth more,
it's worth more. There's no cap on it based on
construction costs. It becomes a pure, unadulterated
bidding war. And that bidding war made people
feel incredibly rich. Which brings us to what
you call the ATM effect. Oh, this is the engine
of the whole economy in the mid -2000s. the secret
sauce explain this to me because i think we assume
that if your house goes up in value you're just
paper rich you can't buy groceries with your
house value unless you sell it unless you borrow
against it it's called mortgage equity withdrawal
that sounds like a dentist procedure it's a lot
more fun than the dentist at least at first basically
if your house goes up by a hundred thousand dollars
the bank calls you and says hey you have a hundred
thousand dollars in new equity we will give you
a loan for eighty thousand dollars of that cash
Right now. A home equity line of credit, AELOC.
Exactly. And the data here is just staggering.
In 1996, American homeowners extracted about
$106 billion in equity this way. Okay, $106 billion.
In 2005, that number hit. $750 billion. Whoa!
That is a 7x increase. $750 billion in one year.
In one year. That is almost a trillion dollars
of cash pulled out of houses and injected into
the economy. And where did that money go? Were
people, you know, investing it? Were they starting
businesses? No, not really. The data shows that
two -thirds of it went to personal consumption.
So jet skis. Jet skis, new cars, vacations, paying
off credit card debt. And home improvements,
which let's be honest, putting in a granite countertop
is just consumption disguises investment. So
in a very real way, the housing bubble was subsidizing
the entire American lifestyle for those few years.
It wasn't just subsidizing it. It was keeping
the economy alive. A lot of analysts believe
that this spending, this wealth effect is what
actually helped avert a deep recession after
the dotcom bust. We were literally eating our
own houses to keep the lights on. Which works
great. Yeah. Until the house stops going up in
value. Correct. The moment prices flatten, the
APM machine turns off. And because people were
spending that money rather than saving or investing
it, when the machine turned off, they had nothing
left. That is terrifying. It's like Wile E. Coyote
running off the cliff. He's fine as long as he
doesn't look down. And in 2006, America looked
down. So we have the setup. We have the mania.
But surely there were people looking at this
and saying, hey, guys, the math doesn't work
here. I want to move to section three, the war
of words, because this wasn't a secret. It was
an open secret, but it was a war. You had two
very, very distinct camps, the deniers and the
Cassandras. The Cassandras being the people predicting
doom from Greek myth. Right. Cursed to see the
future, but never be believed. And the hostility
between these two groups was intense. Let's start
with the deniers, the no bubble camp. Who is
leading the parade? The loudest voice, without
a doubt. was a man named David Larea. And who
was he? He was the chief economist for the National
Association of Realtors, the NAR. OK, so I feel
like his job title implies a certain conflict
of interest. You might say that. His job is literally
to sell houses. But he went above and beyond.
In August 2005, this is pretty much near the
absolute peak, he was distributing these things
he called anti -bubble reports. Anti -bubble
reports. That sounds like pure propaganda. It
reads like it today. He publicly called accusations
of a housing bubble irresponsible. He said the
fundamentals were strong, that baby boomers were
driving demand, that we had a Goldilocks economy.
Irresponsible. That is such a heavy word. He's
basically saying that if you warn people, you
are the bad guy. Exactly. It was a concerted
effort by the entire industry to silence the
critics. You had executives at places like Freddie
Mac doing the exact same thing. They had a fundamental
explanation for every price increase. It's immigration.
It's lack of supply. It's a new paradigm. And
we can't talk about denial without talking about
the man at the very top, the maestro, Alan Greenspan.
The chairman of the Federal Reserve. His stance
is... It's fascinatingly complicated. What was
he saying while all this cheap money was being
printed and house prices were going vertical?
In 2005, he was asked about it, and he famously
admitted that there might be a little froth.
Froth, like on a cappuccino. Just a little foam
on top. He admitted there might be local bubbles
in some markets, like Miami or Vegas, but he
argued strongly against the idea of a national
bubble. He didn't think it was possible for the
entire U .S. housing market to be in a bubble
simultaneously. Why not? What was his reasoning?
Because historically, housing markets are local.
If a factory closes in Detroit, Detroit prices
drop. But that doesn't affect Miami. Greenspan
didn't see that the financing, the subprime loans
that were sold all over the world, had connected
all these local markets into one giant fragile
system. He missed the connection. He did. Later
in 2007, he had to walk it back. He admitted
that froth was basically just a euphemism for
a bubble, a polite way of saying it. It feels
like a massive failure of imagination from the
people in charge. It was, and it went all the
way to the White House. In 2006, President Bush
said, economies should cycle. The prevailing
attitude in leadership was just, this is fine,
this is just the free market working. But then
you have the people who did see it. But Cassandra.
And they were yelling. They were yelling loud.
They were yelling early. Who stands out to you
in the source material as being one of the first?
Dean Baker is a prime example. He's an economist.
And he identified the bubble as early as August
2002. 2002. That's four years before the peak.
That's a lifetime in economics. How did he know?
He was looking at the rent to price ratios. A
really simple metric. Explain that metric to
us. It's simple. If a house costs, say, $500
,000, you should be able to rent it out for a
certain amount, say $3 ,000 a month, to cover
the cost of owning it. But in 2002, prices were
skyrocketing, but rents were staying flat. So
it was way cheaper to rent than to buy. Much
cheaper. And Baker looked at that and said, this
makes no sense. The asset price is completely
detached from its utility value. It's not about
shelter anymore. It's about speculation. Just
simple logic. Logic. Then you had The Economist
magazine. They didn't mince words at all. They
just called it the biggest bubble in history.
But there is one story in the sources that I
found particularly chilling. Because it wasn't
an outsider yelling. It was a call from inside
the house. The Freddie Mac memo. Yeah, this is
a big one. Yeah, tell us about David Andretonis.
So Freddie Mac is one of the giant government
-sponsored entities that buys up mortgages from
lenders. David Andretonis was their chief risk
officer. It was his job to worry. And he was
worried. He was very worried. In 2004, he wrote
a memo to the CEO, a guy named Richard Syron,
and he did not hold back. He said explicitly
that Freddie Mac was financing these risk -laden
loans that threatened the financial stability
of the company and the country. He warned them
about the subprime loans. He saw the quality
of the loans deteriorating. He saw they were
buying up loans with no income verification,
adjustable rates that were going to explode.
He basically said, we are sitting on a time bomb
and we are lighting the fuse. And what did the
CEO do? Did he pull the emergency brake? Reportedly.
He ignored it. Just completely brushed it aside.
Why? I mean, why would you ignore your own risk
officer? Because they were making too much money.
Yeah. It's that simple. If Freddie Mac stopped
buying those risky loans, their competitors would
just buy them instead and make all the profit.
The music was playing and they felt like they
had to keep dancing. That tension between the
math saying stop and the prophet saying go is
really the heart of this whole tragedy. It's
that famous quote from the Citigroup CEO Chuck
Prince. As long as the music is playing, you've
got to get up and dance. And everyone danced
right off the edge of the cliff. So let's talk
about the moment the music actually stopped.
Section four, the burst. Because as you said,
it wasn't one day. It was a slow train wreck.
The real turning point was 2006. That's when
the inventory started to rise. Inventory meaning
the number of for sale signs on lawns. Exactly.
Houses were sitting on the market longer. They
weren't getting 10 offers in the first hour anymore.
Then the median prices began to tick down for
the first time in years. Confidence just plunged.
There was a Fortune magazine article in May 2006
that really called it, didn't it? The great housing
bubble has finally started to deflate. By that
point, it was becoming undeniable in the data,
even if the general public hadn't fully panicked
yet. And this is where we see that neighborhood
effect you mentioned earlier. I found this part
of the reading really fascinating because it
explains why I should care about my neighbor's
finances. This comes from the insights of a guy
named John A. Kilpatrick. He pointed out that
foreclosures are basically contagious. They're
like a virus in a neighborhood. Well, imagine
you live in a nice neighborhood. You pay your
mortgage on time. You take care of your lawn.
You're a good homeowner. But three houses on
your block go into foreclosure because the owners
took out those crazy subprime loans they couldn't
afford. Okay. Those houses sit empty. The lawns
die. Maybe windows get broken. They eventually
get sold by the bank at a fire sale price. way
way below market value right the bank just wants
to get it off its books exactly Well, when an
appraiser comes to value your house, what data
do they use? They use the comps, the recent sales
on your street. So because your neighbors went
bust, your property value drops by 10 % to 20%.
So my innocent house takes a huge hit just by
proximity. Exactly. You lose tens of thousands
of dollars in equity because your neighbor walked
away. Yeah. It creates a death spiral for a neighborhood.
And this started happening everywhere in 2007.
And then the subprime mortgage industry, the
very engine of this whole thing, it just imploded.
March 2007. That's when the dam broke. The high
foreclosure rates meant these lenders weren't
getting paid. Companies like New Century Financial,
which was a huge player, saw their stock plunge
84 % and filed for Chapter 11 bankruptcy. And
this started to spill over into Wall Street,
right? Because these weren't just local lenders.
They were funded by the big investment banks.
Oh, it did. Big time. Bear Stearns had two huge
hedge funds that were heavily invested in subprime
bets. They lost billions. Bear Stearns tried
to pledge $3 .2 billion to rescue them. But the
rot was just too deep. There is a quote here
that we absolutely have to read. It's from Bill
Gross of PMCO. Oh, this is a classic. It's an
all -timer. For context, Bill Gross is the bond
king, a very serious, very powerful financial
figure. And he was criticizing the credit rating
agencies, Moody's and Standard & Poor's. Right.
These agencies were supposed to be the referees.
Their job was to read the safety of bonds. AAA
means super safe, like a government bond. Junk
means risky. And they were rating these bundles
of subprime mortgages as AAA. So Bill Gross says.
He says, talking to the rating agencies, you
were wooed by the makeup, those six -inch hooker
heels, and a tramp stamp. Wow. Tell us how you
really feel, Bill. It is vivid, to say the least.
But his point was deadly serious. He was saying
these were not high -class assets. They were
toxic waste. Those were his words disguised as
high class, safe investments. And Wall Street
fell for the disguise because the yields were
just so sexy. Exactly. They look good on the
outside, but underneath they were completely
rotten. Toxic waste is a good transition to the
fallout because when this stuff exploded, it
went everywhere. Let's talk about the side effects
in Section 5. The most immediate impact was on
the builders. We talked about the boom. You looked
at a company like D .R. Horton. Massive home
builder. Their stock went from $3 in 1997 to
over $42 in 2005. That is just exponential mind
-bending growth. And in the fall? By August 2007,
their shares had fallen to one -third of their
peak levels. The construction industry just ground
to a halt. Cranes stopped moving. Half -built
subdivisions were abandoned. Ghost towns. Literal
ghost towns. But it wasn't just numbers on a
stock ticker. The source material talks about
the very real human cost. This is often overlooked
in these big economic deep dives. We talk about
billions of dollars, but we forget the stress
and the anxiety. There is a documented correlation
between foreclosures and physical illness and
anxiety. The fear of losing your home is incredibly
visceral. It's primal. It destroys marriages.
It destroys health. And it changes the fabric
of neighborhoods. It does. The sources mention
increased violence in these unstable neighborhoods.
When the social fabric of housing breaks down,
when people are constantly moving in and out
or houses are just sitting. Empty communities
destabilize very quickly. Now, one thing that
always surprises people is how this American
housing bubble became a global crisis. I mean,
why did a bad loan in Nevada matter to a bank
in France? This is the securitization piece we
hinted at. This is how the virus spread. We've
got down for us. OK, so a bank in Nevada writes
a mortgage. In the old days, they would keep
that mortgage on their books and collect the
payments for 30 years. Simple enough. But in
the 2000s, they sold that mortgage to Wall Street.
Wall Street then took thousands of these mortgages
from all over the country, put them in a blender
and created something called a mortgage backed
security. It's basically a bond that pays you
money from all those homeowners monthly payments.
OK, so it's a slice of the pie. Right. And then
they sold slices of that pie to investors all
over the world. Pension funds in Norway, banks
in France, local councils in the UK. Everyone
wanted a piece because the returns were so good
and they were rated AAA safe. So when the homeowner
in Nevada stops paying. The money stops flowing
to the mortgage -backed security. And suddenly,
BNP Paribas in France has to suspend three of
its funds because they can't value their assets
anymore. They're exposed to U .S. subprime mortgages,
and they don't even know how much. And Norton
Rock in the U .K., that was a huge story. That
was a dramatic scene, a classic 1930s -style
bank run. People were lining up around the block
to pull their money out. They had a panic withdrawal
of £2 billion in just three days. Because they
thought the bank was insolvent. And it effectively
was. It had a liquidity crisis. The European
Central Bank had to step in with nearly 100 billion
euros in emergency credit just to keep the gears
of the whole system from grinding to a halt.
It really shows that the U .S. didn't just have
a bubble. We exported this toxic waste globally.
We did. We exported the bubble and then we exported
the crash. So the world is on fire. Enter the
government. Section six, the response. The scale
of the intervention was just unprecedented. In
2008 alone, the government allocated over $900
billion to special loans and rescues. $900 billion.
And that was back when a billion dollars still
sounded like a lot of money. Right. Before trillion
became the new normal. And a huge chunk of this
went to Fannie Mae and Freddie Mac. These are
the government -sponsored enterprises, the GSEs
we mentioned. Now, there is a real irony here,
right? Because earlier you said their execs were
denying the bubble and ignoring their own risk
officer. The irony is that while they needed
saving because their market share was so huge
that their failure was unthinkable, their actual
mortgages performed better than the private sector
subprime loans. They had slightly better standards
than the wildest subprime lenders. But they were
still too big to fail. Exactly. If they went
down, the entire U .S. housing market would simply
cease to exist. So the government took them over,
put them into conservatorship. Ultimately, they
were delisted from the New York Stock Exchange
in 2010. And amidst all this chaos, we have the
maestro Alan Greenspan looking back at his handiwork.
The mea culpa. Post -crash, Greenspan had to
testify before Congress, and he admitted he didn't
get it until late 2005 or 2006. He found a flaw
in his ideology. Didn't get it. That is a tough
thing to hear from the guy who is in charge of
the entire economy. He faced heavy, heavy criticism.
He had encouraged people to take out adjustable
rate mortgages, telling them it was a good idea
right before rates were about to rise. And he
vehemently opposed the regulation of derivatives.
Derivatives being those side bets on the mortgages.
Right. The credit default swaps. He fought to
keep that market unregulated and in the dark.
And that unregulated market is what blew up and
took down the global financial system. And politically,
this was just a mess. You had... Democrats like
Senator Schumer proposing bailouts to save homeowners,
arguing it was a humanitarian necessity. And
then the counter argument from the other side
was the moral hazard argument. Explain moral
hazard for us. It's the idea that if you bail
out people who made bad financial decisions,
you just encourage more bad decisions in the
future. If I go to a casino and gamble and lose
and you give me my money back, well, I'm just
going to gamble again. bigger next time. It's
the age old debate. But while they were debating,
the Treasury secretary at the time, Henry Paulson,
called the bubble the most significant risk to
our economy. They had to act. They had to. The
alternative was a total collapse of the banking
system. The ATMs would have literally stopped
working. So the dust settles. We enter the Great
Recession. But eventually things recover. Or
do they? Let's talk about the long term correction
in Section 7. This is where the numbers can be
really deceiving. If you look at nominal prices,
just the raw price tag on the house, by mid -2016,
we were back near the 2006 peak. OK, so 10 years
to get back to even. Anomaly. But if you adjust
for inflation, in 2016, real prices were still
20 % below the peak. Wow. So even a full decade
later, in real terms, homeowners were significantly
poorer than they were in 2006. Exactly. That
is a massive amount of lost wealth, a deckard
of complete stagnation for the middle classes.
main asset. And what about liquidity? Did people
learn to save more after this trauma? Not necessarily.
The crisis destroyed savings. A University of
Michigan study from 2009 to 2011 showed that
while the number of people behind on their mortgage
payments dropped slightly, liquidity just vanished.
Meaning cash on hand, savings. Right. In 2011,
nearly a quarter of American families, 23 .4%,
had no liquid assets. Zero. Zero. Not a dollar
in savings. They were house poor or just poor.
The cushion was completely gone. If the car broke
down, if someone got sick. They were done. So
what does this all mean? We've walked through
the anatomy, the causes, the denial, the spectacular
crash, and the long, painful fallout. When you
step back and look at this mother of all bubbles,
what is the big takeaway for you? I think it
highlights the extreme danger of groupthink.
The danger of that phrase, this time is different.
You had smart people. powerful people looking
at a chart that was going completely vertical
and convincing themselves it was a staircase
to heaven. And actively dismissing the historical
data that said otherwise. Exactly. The illusion
of wealth, that ATM effect we talked about, was
so powerful, so seductive, that no one wanted
to turn it off. Everyone was making money, from
the realtor to the banker to the homeowner. No
one wanted to be the one to turn on the lights
and end the party. It's a really sobering lesson.
But here is my final question for you. We look
back at 2006 and say, how could they not see
it? It was so obvious. Hindsight is always 20
-20, isn't it? Right. So connect this to the
bigger picture for us. Are we safe now or could
this happen again? Well, economies are cyclical.
That is the one constant. And if bubbles are
only definitively identified in hindsight, as
our source material suggests, then it raises
a very provocative thought. Are we standing in
froth right now without knowing it? That is a
scary thought. Look at the current sure thing
investments. Maybe it's not housing this time.
Maybe it's tech stocks. Maybe it's crypto. Maybe
it's AI. Look at the assets that everyone believes
only go up and ask yourself, are you looking
at the fundamentals or are you just being wooed
by the six inch hooker heels? A fantastic callback
to Bill Gross. It is the essential question because
the housing market of 2005 looked like the safest,
most solid bet in the entire world until the
day it wasn't. On that cheery note, we will leave
you to audit your own portfolio. Thank you for
listening to this deep dive into the 2000s housing
bubble. Always a pleasure. See you next time.