WEBVTT 00:00:00.000 --> 00:00:03.660 Welcome back to the deep dive. We are really 00:00:03.660 --> 00:00:06.080 glad you're here because today we are tackling 00:00:06.080 --> 00:00:09.460 a beast. And I do not use that word lightly. 00:00:09.560 --> 00:00:12.080 It is a massive beast. We are looking at a stack 00:00:12.080 --> 00:00:14.800 of notes and research here that tells the story 00:00:14.800 --> 00:00:17.320 of what is, I mean, effectively the mother of 00:00:17.320 --> 00:00:18.980 all bubbles. That's probably the best way to 00:00:18.980 --> 00:00:21.839 put it. We are talking about an event that didn't 00:00:21.839 --> 00:00:24.359 just change the skyline of America literally, 00:00:24.519 --> 00:00:28.100 but it. completely completely rewire the global 00:00:28.100 --> 00:00:30.199 economy and it's a story that I think a lot of 00:00:30.199 --> 00:00:32.320 people feel like they know but you know they 00:00:32.320 --> 00:00:34.240 usually only know the ending right they know 00:00:34.240 --> 00:00:36.259 the crash they know the movie the big short you 00:00:36.259 --> 00:00:39.159 know 2008 was a very bad year to be a banker 00:00:39.159 --> 00:00:42.740 or you know a homeowner exactly but for the deep 00:00:42.740 --> 00:00:46.159 dive today our mission is different we aren't 00:00:46.159 --> 00:00:48.020 just looking at the car crash we want to understand 00:00:48.020 --> 00:00:50.619 the mechanic who you know Cut the brake lines. 00:00:50.960 --> 00:00:53.259 We want to understand the rise. The buildup. 00:00:53.299 --> 00:00:55.439 The buildup. Because before all the panic, there 00:00:55.439 --> 00:00:59.380 was this long, seductive, really intoxicating 00:00:59.380 --> 00:01:01.579 period where it felt like the laws of physics 00:01:01.579 --> 00:01:03.859 just stopped applying to real estate. The delusion 00:01:03.859 --> 00:01:07.019 phase. The delusion. And today we are going to 00:01:07.019 --> 00:01:09.939 unpack how that delusion was built brick by brick. 00:01:10.079 --> 00:01:12.799 We're going to look at the data that proved housing 00:01:12.799 --> 00:01:15.579 had completely decoupled from reality. Okay. 00:01:15.599 --> 00:01:18.090 The specific people who saw it coming. They were 00:01:18.090 --> 00:01:21.430 totally ignored. And the deniers who just kept 00:01:21.430 --> 00:01:23.209 the party going until the lights went out. And 00:01:23.209 --> 00:01:26.030 we're basing this on a deep, deep analysis of 00:01:26.030 --> 00:01:29.090 the Wikipedia entry for the 2000s United States 00:01:29.090 --> 00:01:31.829 housing bubble. And we've got contemporary debates, 00:01:32.049 --> 00:01:34.430 economic timelines, all the stuff on the subprime 00:01:34.430 --> 00:01:37.209 mortgage collapse. It is a lot to get through. 00:01:37.370 --> 00:01:40.640 It is. Yeah. But to really get it. You have to 00:01:40.640 --> 00:01:42.260 sort of transport yourself back. You have to 00:01:42.260 --> 00:01:45.379 go back to the thoroughly to mid 2000s. OK, I'm 00:01:45.379 --> 00:01:48.019 there. Low rise jeans, flip phones are everywhere. 00:01:48.359 --> 00:01:51.140 What's the economic vibe? The vibe is what economists 00:01:51.140 --> 00:01:54.219 call irrational exuberance. You have to remember, 00:01:54.319 --> 00:01:55.799 everywhere you looked, there was construction, 00:01:56.040 --> 00:01:58.480 just cranes in the sky. Right. And there was 00:01:58.480 --> 00:02:01.980 this pervasive cultural belief. I mean, it was 00:02:01.980 --> 00:02:04.560 almost a religious belief that home prices only 00:02:04.560 --> 00:02:07.079 go up. It was the ultimate cocktail party conversation, 00:02:07.260 --> 00:02:09.740 wasn't it? It was. It absolutely was. If you 00:02:09.740 --> 00:02:11.680 weren't flipping a condo, you were losing out. 00:02:11.819 --> 00:02:14.240 It wasn't just a place to live. It was a sure 00:02:14.240 --> 00:02:17.340 thing. A guaranteed win. A winning lottery ticket 00:02:17.340 --> 00:02:19.680 that you could sleep inside. Yeah. It was perfect. 00:02:19.939 --> 00:02:22.259 But here is the question I have. Looking at all 00:02:22.259 --> 00:02:24.759 the data we have today, was it really that historic? 00:02:24.840 --> 00:02:27.319 I mean, real estate always booms and busts. Was 00:02:27.319 --> 00:02:29.500 this one actually special or are we just being 00:02:29.500 --> 00:02:32.199 dramatic? No, no. It was completely anomalous. 00:02:32.240 --> 00:02:35.900 It broke the charts. Oh, so? Well, to answer 00:02:35.900 --> 00:02:39.159 that, we really have to look at the work of Robert 00:02:39.159 --> 00:02:41.479 Schiller. The irrational exuberance guy. The 00:02:41.479 --> 00:02:44.560 very same. He literally wrote the book on bubbles. 00:02:45.539 --> 00:02:48.680 And he did something really simple but revolutionary. 00:02:49.550 --> 00:02:52.389 He plotted U .S. home prices going all the way 00:02:52.389 --> 00:02:55.830 back to 1890, over 100 years of data. OK, so 00:02:55.830 --> 00:02:57.710 we have a century of housing prices. That's a 00:02:57.710 --> 00:02:59.669 pretty good baseline. A great baseline. And he 00:02:59.669 --> 00:03:02.310 adjusted it for inflation because obviously a 00:03:02.310 --> 00:03:05.250 house in 1890 cost, what, $3 ,000? Now it costs 00:03:05.250 --> 00:03:07.569 $300 ,000. But that's mostly just the dollar 00:03:07.569 --> 00:03:09.789 losing value over time. Right. He wanted to know 00:03:09.789 --> 00:03:12.409 the real value growth. So if you strip out inflation, 00:03:12.830 --> 00:03:15.250 how much does a house actually go up in value 00:03:15.250 --> 00:03:17.569 per year? Like, what's the magic number? From 00:03:17.569 --> 00:03:22.689 1890. All the way to 2004. Yeah. 0 .4 % per year. 00:03:22.949 --> 00:03:28.949 Wait. 0 .4? Not 4 %? 0 .4%. Less than half a 00:03:28.949 --> 00:03:31.990 percent. That just doesn't feel right. I mean, 00:03:31.990 --> 00:03:33.689 my parents bought a house in the 80s, and they 00:03:33.689 --> 00:03:36.030 sold it for way, way more than they paid. That 00:03:36.030 --> 00:03:38.509 feels like it has to be more than 0 .4%. And 00:03:38.509 --> 00:03:40.770 that is the trap. See, your parents' house went 00:03:40.770 --> 00:03:43.569 up in nominal dollars, but did it beat inflation 00:03:43.569 --> 00:03:48.479 by some massive margin? Probably not. Okay. Think 00:03:48.479 --> 00:03:51.539 about it this way. Houses get old. Roofs leak. 00:03:52.009 --> 00:03:55.069 Pipes burst. Styles change. The physical structure 00:03:55.069 --> 00:03:57.210 actually depreciates, kind of like a car. Right. 00:03:57.270 --> 00:03:59.990 The wood rots. The carpet gets gross. The avocado 00:03:59.990 --> 00:04:03.110 green kitchen goes out of style. Exactly. The 00:04:03.110 --> 00:04:05.189 land underneath it might get more valuable, sure, 00:04:05.270 --> 00:04:08.110 but the house itself is a decaying asset. So 00:04:08.110 --> 00:04:10.490 historically, housing is a store of value. It's 00:04:10.490 --> 00:04:12.110 like a savings account that keeps up with inflation. 00:04:12.330 --> 00:04:14.490 It is not a rocket ship to wealth. Yeah. Okay. 00:04:14.569 --> 00:04:17.910 So the historical reality is 0 .4 % growth. That's 00:04:17.910 --> 00:04:21.699 the anchor. But what was the perception in the 00:04:21.699 --> 00:04:24.439 2000s? What did people think was happening? Well, 00:04:24.579 --> 00:04:27.100 Schiller did a survey to find out. He looked 00:04:27.100 --> 00:04:30.000 at the period from 1940 to 2004. He asked recent 00:04:30.000 --> 00:04:32.680 homebuyers, how much do you think your home is 00:04:32.680 --> 00:04:34.620 increasing in value every year? And what did 00:04:34.620 --> 00:04:37.540 they say? The average answer for that whole period, 00:04:37.620 --> 00:04:39.639 the self -assessed value, was around 2 % per 00:04:39.639 --> 00:04:42.459 year above inflation. Yeah. But by the time you 00:04:42.459 --> 00:04:45.040 get to 2004 instead of 2005, people were expecting 00:04:45.040 --> 00:04:49.139 10%, 15 % annual gains. Indefinitely. So the 00:04:49.139 --> 00:04:52.259 gap between the reality of 0 .4 % and the wild 00:04:52.259 --> 00:04:55.360 expectation of 15%, that's the bubble. That is 00:04:55.360 --> 00:04:57.519 the chasm where the entire economy fell in. I 00:04:57.519 --> 00:04:59.019 mean, people were borrowing money based on a 00:04:59.019 --> 00:05:00.879 sort of fantasy trajectory. They were spending 00:05:00.879 --> 00:05:02.680 future wealth that didn't actually exist. And 00:05:02.680 --> 00:05:04.620 when did that trajectory finally hit the wall? 00:05:04.779 --> 00:05:06.899 Because I think we all just used 2008 as the 00:05:06.899 --> 00:05:09.199 shorthand, but the sources we have suggest the 00:05:09.199 --> 00:05:11.220 peak was way earlier than that. Much earlier. 00:05:11.360 --> 00:05:13.439 The peak of the madness, the absolute top of 00:05:13.439 --> 00:05:16.850 the price chart was early 2006. 2006. So for 00:05:16.850 --> 00:05:18.910 two whole years, the market was actually falling 00:05:18.910 --> 00:05:20.889 before the big crash that everyone remembers. 00:05:21.110 --> 00:05:23.129 Exactly. It wasn't a sudden explosion. It was 00:05:23.129 --> 00:05:25.850 a slow hiss. The air started coming out of the 00:05:25.850 --> 00:05:29.629 balloon in 2006 and 2007. Prices were ticking 00:05:29.629 --> 00:05:32.810 down month after month. But the panic didn't 00:05:32.810 --> 00:05:34.769 set in until the financial systems themselves 00:05:34.769 --> 00:05:37.569 started to break later on. And do we have a specific 00:05:37.569 --> 00:05:40.730 date for like the worst of it, the moment of 00:05:40.730 --> 00:05:43.470 maximum pain in the numbers? December 30, 2008. 00:05:44.240 --> 00:05:46.259 That's when the Case -Shiller Home Price Index 00:05:46.259 --> 00:05:48.800 reported the single largest price drop in its 00:05:48.800 --> 00:05:51.740 history. But even then, it wasn't over. Prices 00:05:51.740 --> 00:05:54.759 kept grinding downward, finding new lows all 00:05:54.759 --> 00:05:58.660 the way until 2011. That is such a long hangover. 00:05:58.699 --> 00:06:01.980 Five years of just falling prices. Is it a brutal, 00:06:02.040 --> 00:06:04.740 slow grinding process? Yeah, I want to zoom in 00:06:04.740 --> 00:06:06.500 on the map for a second. Because there is this 00:06:06.500 --> 00:06:09.019 idea that the entire United States went crazy. 00:06:09.180 --> 00:06:11.420 Was every single house in America suddenly worth 00:06:11.420 --> 00:06:13.699 double? No. And this is a really, really important 00:06:13.699 --> 00:06:16.319 nuance. The bubble was widespread. I mean, it 00:06:16.319 --> 00:06:18.819 affected more than half the states. But the intensity 00:06:18.819 --> 00:06:20.360 was totally different depending on where you 00:06:20.360 --> 00:06:22.240 lived. Right. We talk about the sand states. 00:06:22.600 --> 00:06:25.160 Sand states. California, Florida, Arizona, Nevada. 00:06:26.029 --> 00:06:28.269 The places with sun and sand. Okay, that makes 00:06:28.269 --> 00:06:31.149 sense. If you look at cities like Miami, Las 00:06:31.149 --> 00:06:34.310 Vegas, Phoenix, San Diego, and you can throw 00:06:34.310 --> 00:06:37.930 D .C. in there too, these places saw absolute 00:06:37.930 --> 00:06:40.850 mania. We're talking appreciation of over 80 00:06:40.850 --> 00:06:44.870 % in a very short window of time. 80 %? That's 00:06:44.870 --> 00:06:47.209 nearly doubling your money just for owning a 00:06:47.209 --> 00:06:49.930 house for a few years. It was completely unsustainable. 00:06:50.009 --> 00:06:52.290 But then you look at the middle of the country. 00:06:52.490 --> 00:06:55.209 Look at the Rust Belt. You know, Cleveland, Detroit, 00:06:55.470 --> 00:06:57.790 or even places like Dallas and Denver. Did they 00:06:57.790 --> 00:07:00.129 boom too? Hardly at all. In the same period where 00:07:00.129 --> 00:07:02.949 Miami is up 80%, places like Cleveland or Dallas 00:07:02.949 --> 00:07:05.250 saw less than 10 % growth. See, they missed the 00:07:05.250 --> 00:07:08.610 party. They missed the champagne, yes. But, and 00:07:08.610 --> 00:07:11.810 here is the really cruel twist, they did not 00:07:11.810 --> 00:07:13.949 miss the hangover. What do you mean by that? 00:07:14.009 --> 00:07:16.149 If their prices didn't spike, why would they 00:07:16.149 --> 00:07:18.810 crash? Because the crash wasn't just about prices 00:07:18.810 --> 00:07:21.610 resetting to normal. It was about the whole economy 00:07:21.610 --> 00:07:24.870 breaking. When the bubble burst in 2008, it took 00:07:24.870 --> 00:07:27.069 the banking system with it. Credit froze up. 00:07:27.350 --> 00:07:29.829 Jobs just evaporated. So if you're in Detroit. 00:07:30.050 --> 00:07:32.329 If you are in Detroit and the auto industry collapses 00:07:32.329 --> 00:07:35.550 because of this global recession, you lose your 00:07:35.550 --> 00:07:37.819 job. You can't pay your mortgage. It doesn't 00:07:37.819 --> 00:07:39.819 matter that your house didn't double in value. 00:07:40.060 --> 00:07:43.300 You still get foreclosed on. That seems incredibly 00:07:43.300 --> 00:07:46.480 unfair. It is. The sources show that places with 00:07:46.480 --> 00:07:49.800 already weak local economies like Detroit actually 00:07:49.800 --> 00:07:53.060 suffered remarkably high foreclosure rates, even 00:07:53.060 --> 00:07:54.800 though they never had that bubble appreciation. 00:07:54.939 --> 00:07:56.959 The worst of both worlds. They got the worst 00:07:56.959 --> 00:07:59.759 of both worlds. Yeah. Exactly. Wow. OK, so we 00:07:59.759 --> 00:08:02.920 have the what prices completely decoupled from 00:08:02.920 --> 00:08:05.319 a century of history, mostly in these sand states. 00:08:05.389 --> 00:08:08.209 but eventually dragging everyone down. Now, I 00:08:08.209 --> 00:08:10.149 really want to get to the how. The mechanics. 00:08:10.529 --> 00:08:13.790 Yes. How did we get here? Because it can't just 00:08:13.790 --> 00:08:15.509 be that everyone woke up one day and decided 00:08:15.509 --> 00:08:17.889 to overpay for condos. There had to be fuel on 00:08:17.889 --> 00:08:19.990 the fire. There was a lot of fuel. Yeah. The 00:08:19.990 --> 00:08:22.850 sources lay out a perfect storm scenario. It 00:08:22.850 --> 00:08:25.649 wasn't one thing. It was four or five massive 00:08:25.649 --> 00:08:28.509 catalysts hitting at the exact same time. Walk 00:08:28.509 --> 00:08:30.689 me through them. What's number one? First, you 00:08:30.689 --> 00:08:33.009 have tax policy. Okay, this is the stuff that 00:08:33.009 --> 00:08:34.909 usually puts people to sleep, but I have a feeling 00:08:34.909 --> 00:08:36.830 it's really important here. Crucially important. 00:08:37.070 --> 00:08:40.549 In 1997, the Taxpayer Relief Act was passed. 00:08:41.029 --> 00:08:44.129 And it did something huge. It exempted a massive 00:08:44.129 --> 00:08:46.529 amount of profit from selling your home from 00:08:46.529 --> 00:08:51.009 capital gains taxes. Specifically, $500 ,000 00:08:51.009 --> 00:08:53.929 for a married couple. So if I buy a stock and 00:08:53.929 --> 00:08:56.990 I make $100 ,000, I pay taxes. If I buy a house 00:08:56.990 --> 00:08:59.529 and make $100 ,000. You likely pay zero tax on 00:08:59.529 --> 00:09:01.919 that gain. So the government is basically incentivizing 00:09:01.919 --> 00:09:04.960 me to put my money in a house rather than the 00:09:04.960 --> 00:09:08.039 stock market. Exactly. It makes housing a tax 00:09:08.039 --> 00:09:10.019 privileged investment. So that's ingredient one. 00:09:10.620 --> 00:09:12.919 Ingredient two, interest rates were at historic 00:09:12.919 --> 00:09:15.019 lows. Money was cheap. Money was cheap, which 00:09:15.019 --> 00:09:17.200 means you can borrow more. The Federal Reserve. 00:09:17.850 --> 00:09:20.529 Under Alan Greenspan, kept rates very low to 00:09:20.529 --> 00:09:22.730 stimulate the economy after 9 -11 and the dot 00:09:22.730 --> 00:09:25.370 -com crash. Okay, ingredient three. Lax lending 00:09:25.370 --> 00:09:28.129 standards. This is the rise of subprime. We hear 00:09:28.129 --> 00:09:30.169 that word subprime thrown around constantly. 00:09:30.370 --> 00:09:33.169 What does it actually mean in this context? So 00:09:33.169 --> 00:09:36.309 think of prime as a borrower with good credit, 00:09:36.429 --> 00:09:40.309 a steady job, and a down payment. A safe bet. 00:09:40.970 --> 00:09:43.710 Subprime is a borrower who might have bad credit, 00:09:43.830 --> 00:09:48.009 no down payment, or irregular income. And traditionally, 00:09:48.210 --> 00:09:50.929 banks wouldn't lend to them. Right. Or they would 00:09:50.929 --> 00:09:52.529 charge them a huge interest rate to compensate 00:09:52.529 --> 00:09:55.750 for the risk. But in the 2000s, standards just 00:09:55.750 --> 00:09:59.309 like they collapsed. We started seeing ninja 00:09:59.309 --> 00:10:02.649 loans. And NNJE, like a guy in a mask. No, an 00:10:02.649 --> 00:10:06.740 INJA, no income, no job or assets. Wait, wait, 00:10:06.759 --> 00:10:08.840 they were giving loans to people without even 00:10:08.840 --> 00:10:11.440 verifying if they had a job? Exactly. Or they'd 00:10:11.440 --> 00:10:13.279 accept stated income where you just write down 00:10:13.279 --> 00:10:15.059 what you make and they don't check it. Because 00:10:15.059 --> 00:10:16.960 the assumption was, even if you can't pay, the 00:10:16.960 --> 00:10:18.700 house value will go up, so we can just sell the 00:10:18.700 --> 00:10:20.600 house and get our money back. The house was the 00:10:20.600 --> 00:10:23.120 collateral. That is just wild. And the fourth 00:10:23.120 --> 00:10:25.139 ingredient connects back to that dot -com bubble 00:10:25.139 --> 00:10:28.360 we mentioned. The late 90s tech boom. Yes. Think 00:10:28.360 --> 00:10:29.980 about the psychology of the country. The dot 00:10:29.980 --> 00:10:33.080 -com bubble bursts around 2000, 2001. People 00:10:33.080 --> 00:10:34.860 get slaughtered in the stock market. They watch 00:10:34.860 --> 00:10:36.639 their retirement accounts just vanish in pets 00:10:36.639 --> 00:10:39.139 .com or whatever. They're burned. They don't 00:10:39.139 --> 00:10:41.100 trust a Wall Street. Right. So where does all 00:10:41.100 --> 00:10:43.519 that capital go? It needs a safe harbor. And 00:10:43.519 --> 00:10:45.960 there is an old saying, right? Safe as houses. 00:10:46.679 --> 00:10:49.679 Money fled the stock market and poured into real 00:10:49.679 --> 00:10:52.480 estate. Robert Shiller actually wrote an article 00:10:52.480 --> 00:10:55.340 for Barron's in 2005 called The Bubble's New 00:10:55.340 --> 00:10:58.610 Home. That's a great title. It's perfect. He 00:10:58.610 --> 00:11:01.549 argued that the emotional energy, that speculative 00:11:01.549 --> 00:11:04.409 mania that was in tech stocks, didn't just disappear. 00:11:04.649 --> 00:11:08.450 It migrated. The bubble changed its address from 00:11:08.450 --> 00:11:11.409 Silicon Valley to the suburbs. So people started 00:11:11.409 --> 00:11:13.970 trading houses like they used to trade tech stocks. 00:11:14.309 --> 00:11:17.879 Exactly. But there is a physical reality to houses 00:11:17.879 --> 00:11:20.519 that stocks don't have. And this leads to a really 00:11:20.519 --> 00:11:23.059 surprising nuance in the data about what exactly 00:11:23.059 --> 00:11:25.019 got so expensive. I remember reading this in 00:11:25.019 --> 00:11:26.620 the notes. It's the whole land versus structure 00:11:26.620 --> 00:11:29.200 thing. Right. When you buy a house, you are buying 00:11:29.200 --> 00:11:31.600 two things. You are buying a pile of wood and 00:11:31.600 --> 00:11:33.759 bricks, the structure. Yeah. And you're buying 00:11:33.759 --> 00:11:36.059 the patch of earth that sits on the land. OK, 00:11:36.139 --> 00:11:38.779 that's simple enough. The cost to build the structure, 00:11:38.879 --> 00:11:40.740 you know, the lumber, the labor that goes up 00:11:40.740 --> 00:11:43.580 with inflation, maybe a little more. But it didn't 00:11:43.580 --> 00:11:46.070 triple in five years. Right. The source material 00:11:46.070 --> 00:11:48.809 highlights that in those high -priced markets 00:11:48.809 --> 00:11:52.029 like San Francisco or Miami, the land value reached 00:11:52.029 --> 00:11:56.090 85 % of the total house value. 85%. So if I buy 00:11:56.090 --> 00:11:59.210 a million -dollar house, I'm paying $850 ,000 00:11:59.210 --> 00:12:01.870 for the dirt. You're paying for the location. 00:12:01.889 --> 00:12:04.649 You're paying for the scarcity. Because, you 00:12:04.649 --> 00:12:06.990 know, God isn't making any more land in San Francisco. 00:12:07.149 --> 00:12:09.370 So why does that matter for the bubble? Because 00:12:09.370 --> 00:12:11.990 land is purely speculative. You can't reproduce 00:12:11.990 --> 00:12:14.549 it. If everyone decides the land is worth more, 00:12:14.669 --> 00:12:17.250 it's worth more. There's no cap on it based on 00:12:17.250 --> 00:12:20.730 construction costs. It becomes a pure, unadulterated 00:12:20.730 --> 00:12:23.350 bidding war. And that bidding war made people 00:12:23.350 --> 00:12:27.809 feel incredibly rich. Which brings us to what 00:12:27.809 --> 00:12:30.250 you call the ATM effect. Oh, this is the engine 00:12:30.250 --> 00:12:32.820 of the whole economy in the mid -2000s. the secret 00:12:32.820 --> 00:12:35.639 sauce explain this to me because i think we assume 00:12:35.639 --> 00:12:37.700 that if your house goes up in value you're just 00:12:37.700 --> 00:12:40.139 paper rich you can't buy groceries with your 00:12:40.139 --> 00:12:42.799 house value unless you sell it unless you borrow 00:12:42.799 --> 00:12:45.720 against it it's called mortgage equity withdrawal 00:12:45.720 --> 00:12:48.759 that sounds like a dentist procedure it's a lot 00:12:48.759 --> 00:12:51.399 more fun than the dentist at least at first basically 00:12:51.399 --> 00:12:53.679 if your house goes up by a hundred thousand dollars 00:12:53.679 --> 00:12:56.299 the bank calls you and says hey you have a hundred 00:12:56.299 --> 00:12:58.580 thousand dollars in new equity we will give you 00:12:58.580 --> 00:13:01.100 a loan for eighty thousand dollars of that cash 00:13:01.720 --> 00:13:05.259 Right now. A home equity line of credit, AELOC. 00:13:05.440 --> 00:13:08.080 Exactly. And the data here is just staggering. 00:13:08.179 --> 00:13:11.379 In 1996, American homeowners extracted about 00:13:11.379 --> 00:13:15.039 $106 billion in equity this way. Okay, $106 billion. 00:13:15.299 --> 00:13:19.490 In 2005, that number hit. $750 billion. Whoa! 00:13:20.049 --> 00:13:24.289 That is a 7x increase. $750 billion in one year. 00:13:24.429 --> 00:13:26.669 In one year. That is almost a trillion dollars 00:13:26.669 --> 00:13:28.830 of cash pulled out of houses and injected into 00:13:28.830 --> 00:13:30.629 the economy. And where did that money go? Were 00:13:30.629 --> 00:13:32.649 people, you know, investing it? Were they starting 00:13:32.649 --> 00:13:35.549 businesses? No, not really. The data shows that 00:13:35.549 --> 00:13:37.090 two -thirds of it went to personal consumption. 00:13:37.309 --> 00:13:40.570 So jet skis. Jet skis, new cars, vacations, paying 00:13:40.570 --> 00:13:42.389 off credit card debt. And home improvements, 00:13:42.610 --> 00:13:45.509 which let's be honest, putting in a granite countertop 00:13:45.509 --> 00:13:48.149 is just consumption disguises investment. So 00:13:48.149 --> 00:13:51.769 in a very real way, the housing bubble was subsidizing 00:13:51.769 --> 00:13:54.210 the entire American lifestyle for those few years. 00:13:54.409 --> 00:13:56.830 It wasn't just subsidizing it. It was keeping 00:13:56.830 --> 00:13:59.190 the economy alive. A lot of analysts believe 00:13:59.190 --> 00:14:02.169 that this spending, this wealth effect is what 00:14:02.169 --> 00:14:04.690 actually helped avert a deep recession after 00:14:04.690 --> 00:14:07.889 the dotcom bust. We were literally eating our 00:14:07.889 --> 00:14:09.750 own houses to keep the lights on. Which works 00:14:09.750 --> 00:14:12.179 great. Yeah. Until the house stops going up in 00:14:12.179 --> 00:14:14.799 value. Correct. The moment prices flatten, the 00:14:14.799 --> 00:14:17.419 APM machine turns off. And because people were 00:14:17.419 --> 00:14:19.399 spending that money rather than saving or investing 00:14:19.399 --> 00:14:21.480 it, when the machine turned off, they had nothing 00:14:21.480 --> 00:14:24.240 left. That is terrifying. It's like Wile E. Coyote 00:14:24.240 --> 00:14:26.340 running off the cliff. He's fine as long as he 00:14:26.340 --> 00:14:29.080 doesn't look down. And in 2006, America looked 00:14:29.080 --> 00:14:32.080 down. So we have the setup. We have the mania. 00:14:32.559 --> 00:14:34.879 But surely there were people looking at this 00:14:34.879 --> 00:14:36.799 and saying, hey, guys, the math doesn't work 00:14:36.799 --> 00:14:39.360 here. I want to move to section three, the war 00:14:39.360 --> 00:14:41.720 of words, because this wasn't a secret. It was 00:14:41.720 --> 00:14:44.860 an open secret, but it was a war. You had two 00:14:44.860 --> 00:14:48.940 very, very distinct camps, the deniers and the 00:14:48.940 --> 00:14:51.139 Cassandras. The Cassandras being the people predicting 00:14:51.139 --> 00:14:54.720 doom from Greek myth. Right. Cursed to see the 00:14:54.720 --> 00:14:57.759 future, but never be believed. And the hostility 00:14:57.759 --> 00:15:00.159 between these two groups was intense. Let's start 00:15:00.159 --> 00:15:03.740 with the deniers, the no bubble camp. Who is 00:15:03.740 --> 00:15:06.419 leading the parade? The loudest voice, without 00:15:06.419 --> 00:15:09.779 a doubt. was a man named David Larea. And who 00:15:09.779 --> 00:15:12.259 was he? He was the chief economist for the National 00:15:12.259 --> 00:15:16.440 Association of Realtors, the NAR. OK, so I feel 00:15:16.440 --> 00:15:19.620 like his job title implies a certain conflict 00:15:19.620 --> 00:15:22.480 of interest. You might say that. His job is literally 00:15:22.480 --> 00:15:25.019 to sell houses. But he went above and beyond. 00:15:25.179 --> 00:15:27.299 In August 2005, this is pretty much near the 00:15:27.299 --> 00:15:29.399 absolute peak, he was distributing these things 00:15:29.399 --> 00:15:32.340 he called anti -bubble reports. Anti -bubble 00:15:32.340 --> 00:15:34.679 reports. That sounds like pure propaganda. It 00:15:34.679 --> 00:15:37.279 reads like it today. He publicly called accusations 00:15:37.279 --> 00:15:40.000 of a housing bubble irresponsible. He said the 00:15:40.000 --> 00:15:42.120 fundamentals were strong, that baby boomers were 00:15:42.120 --> 00:15:44.779 driving demand, that we had a Goldilocks economy. 00:15:45.559 --> 00:15:48.059 Irresponsible. That is such a heavy word. He's 00:15:48.059 --> 00:15:50.240 basically saying that if you warn people, you 00:15:50.240 --> 00:15:52.870 are the bad guy. Exactly. It was a concerted 00:15:52.870 --> 00:15:55.009 effort by the entire industry to silence the 00:15:55.009 --> 00:15:57.129 critics. You had executives at places like Freddie 00:15:57.129 --> 00:15:59.669 Mac doing the exact same thing. They had a fundamental 00:15:59.669 --> 00:16:02.990 explanation for every price increase. It's immigration. 00:16:03.370 --> 00:16:05.889 It's lack of supply. It's a new paradigm. And 00:16:05.889 --> 00:16:08.210 we can't talk about denial without talking about 00:16:08.210 --> 00:16:11.690 the man at the very top, the maestro, Alan Greenspan. 00:16:11.889 --> 00:16:13.690 The chairman of the Federal Reserve. His stance 00:16:13.690 --> 00:16:17.889 is... It's fascinatingly complicated. What was 00:16:17.889 --> 00:16:19.850 he saying while all this cheap money was being 00:16:19.850 --> 00:16:21.929 printed and house prices were going vertical? 00:16:22.230 --> 00:16:25.570 In 2005, he was asked about it, and he famously 00:16:25.570 --> 00:16:28.350 admitted that there might be a little froth. 00:16:28.370 --> 00:16:30.330 Froth, like on a cappuccino. Just a little foam 00:16:30.330 --> 00:16:33.049 on top. He admitted there might be local bubbles 00:16:33.049 --> 00:16:36.509 in some markets, like Miami or Vegas, but he 00:16:36.509 --> 00:16:38.629 argued strongly against the idea of a national 00:16:38.629 --> 00:16:41.090 bubble. He didn't think it was possible for the 00:16:41.090 --> 00:16:43.169 entire U .S. housing market to be in a bubble 00:16:43.169 --> 00:16:45.509 simultaneously. Why not? What was his reasoning? 00:16:45.750 --> 00:16:47.990 Because historically, housing markets are local. 00:16:48.409 --> 00:16:51.730 If a factory closes in Detroit, Detroit prices 00:16:51.730 --> 00:16:54.529 drop. But that doesn't affect Miami. Greenspan 00:16:54.529 --> 00:16:56.909 didn't see that the financing, the subprime loans 00:16:56.909 --> 00:16:59.029 that were sold all over the world, had connected 00:16:59.029 --> 00:17:02.289 all these local markets into one giant fragile 00:17:02.289 --> 00:17:05.789 system. He missed the connection. He did. Later 00:17:05.789 --> 00:17:08.880 in 2007, he had to walk it back. He admitted 00:17:08.880 --> 00:17:11.500 that froth was basically just a euphemism for 00:17:11.500 --> 00:17:14.059 a bubble, a polite way of saying it. It feels 00:17:14.059 --> 00:17:16.420 like a massive failure of imagination from the 00:17:16.420 --> 00:17:18.579 people in charge. It was, and it went all the 00:17:18.579 --> 00:17:21.900 way to the White House. In 2006, President Bush 00:17:21.900 --> 00:17:25.220 said, economies should cycle. The prevailing 00:17:25.220 --> 00:17:27.160 attitude in leadership was just, this is fine, 00:17:27.299 --> 00:17:29.400 this is just the free market working. But then 00:17:29.400 --> 00:17:32.059 you have the people who did see it. But Cassandra. 00:17:32.160 --> 00:17:33.400 And they were yelling. They were yelling loud. 00:17:33.440 --> 00:17:35.180 They were yelling early. Who stands out to you 00:17:35.180 --> 00:17:37.039 in the source material as being one of the first? 00:17:37.259 --> 00:17:39.359 Dean Baker is a prime example. He's an economist. 00:17:39.500 --> 00:17:41.740 And he identified the bubble as early as August 00:17:41.740 --> 00:17:45.019 2002. 2002. That's four years before the peak. 00:17:45.299 --> 00:17:48.240 That's a lifetime in economics. How did he know? 00:17:48.420 --> 00:17:50.920 He was looking at the rent to price ratios. A 00:17:50.920 --> 00:17:53.019 really simple metric. Explain that metric to 00:17:53.019 --> 00:17:56.220 us. It's simple. If a house costs, say, $500 00:17:56.220 --> 00:17:59.039 ,000, you should be able to rent it out for a 00:17:59.039 --> 00:18:01.660 certain amount, say $3 ,000 a month, to cover 00:18:01.660 --> 00:18:05.579 the cost of owning it. But in 2002, prices were 00:18:05.579 --> 00:18:08.480 skyrocketing, but rents were staying flat. So 00:18:08.480 --> 00:18:10.599 it was way cheaper to rent than to buy. Much 00:18:10.599 --> 00:18:12.859 cheaper. And Baker looked at that and said, this 00:18:12.859 --> 00:18:15.619 makes no sense. The asset price is completely 00:18:15.619 --> 00:18:19.279 detached from its utility value. It's not about 00:18:19.279 --> 00:18:21.380 shelter anymore. It's about speculation. Just 00:18:21.380 --> 00:18:23.960 simple logic. Logic. Then you had The Economist 00:18:23.960 --> 00:18:26.279 magazine. They didn't mince words at all. They 00:18:26.279 --> 00:18:28.059 just called it the biggest bubble in history. 00:18:28.420 --> 00:18:30.539 But there is one story in the sources that I 00:18:30.539 --> 00:18:33.299 found particularly chilling. Because it wasn't 00:18:33.299 --> 00:18:35.579 an outsider yelling. It was a call from inside 00:18:35.579 --> 00:18:38.420 the house. The Freddie Mac memo. Yeah, this is 00:18:38.420 --> 00:18:40.380 a big one. Yeah, tell us about David Andretonis. 00:18:40.500 --> 00:18:42.220 So Freddie Mac is one of the giant government 00:18:42.220 --> 00:18:44.119 -sponsored entities that buys up mortgages from 00:18:44.119 --> 00:18:47.000 lenders. David Andretonis was their chief risk 00:18:47.000 --> 00:18:49.869 officer. It was his job to worry. And he was 00:18:49.869 --> 00:18:53.990 worried. He was very worried. In 2004, he wrote 00:18:53.990 --> 00:18:57.109 a memo to the CEO, a guy named Richard Syron, 00:18:57.190 --> 00:19:01.069 and he did not hold back. He said explicitly 00:19:01.069 --> 00:19:04.130 that Freddie Mac was financing these risk -laden 00:19:04.130 --> 00:19:06.470 loans that threatened the financial stability 00:19:06.470 --> 00:19:09.450 of the company and the country. He warned them 00:19:09.450 --> 00:19:11.869 about the subprime loans. He saw the quality 00:19:11.869 --> 00:19:14.309 of the loans deteriorating. He saw they were 00:19:14.309 --> 00:19:16.630 buying up loans with no income verification, 00:19:16.970 --> 00:19:18.910 adjustable rates that were going to explode. 00:19:19.269 --> 00:19:21.990 He basically said, we are sitting on a time bomb 00:19:21.990 --> 00:19:24.509 and we are lighting the fuse. And what did the 00:19:24.509 --> 00:19:27.630 CEO do? Did he pull the emergency brake? Reportedly. 00:19:27.769 --> 00:19:30.250 He ignored it. Just completely brushed it aside. 00:19:30.509 --> 00:19:32.910 Why? I mean, why would you ignore your own risk 00:19:32.910 --> 00:19:35.009 officer? Because they were making too much money. 00:19:35.150 --> 00:19:37.349 Yeah. It's that simple. If Freddie Mac stopped 00:19:37.349 --> 00:19:39.670 buying those risky loans, their competitors would 00:19:39.670 --> 00:19:41.170 just buy them instead and make all the profit. 00:19:41.589 --> 00:19:43.230 The music was playing and they felt like they 00:19:43.230 --> 00:19:45.490 had to keep dancing. That tension between the 00:19:45.490 --> 00:19:48.309 math saying stop and the prophet saying go is 00:19:48.309 --> 00:19:50.950 really the heart of this whole tragedy. It's 00:19:50.950 --> 00:19:53.490 that famous quote from the Citigroup CEO Chuck 00:19:53.490 --> 00:19:56.029 Prince. As long as the music is playing, you've 00:19:56.029 --> 00:19:58.150 got to get up and dance. And everyone danced 00:19:58.150 --> 00:20:00.789 right off the edge of the cliff. So let's talk 00:20:00.789 --> 00:20:02.589 about the moment the music actually stopped. 00:20:02.789 --> 00:20:06.509 Section four, the burst. Because as you said, 00:20:06.549 --> 00:20:08.470 it wasn't one day. It was a slow train wreck. 00:20:09.049 --> 00:20:12.470 The real turning point was 2006. That's when 00:20:12.470 --> 00:20:14.890 the inventory started to rise. Inventory meaning 00:20:14.890 --> 00:20:18.309 the number of for sale signs on lawns. Exactly. 00:20:18.809 --> 00:20:21.089 Houses were sitting on the market longer. They 00:20:21.089 --> 00:20:23.250 weren't getting 10 offers in the first hour anymore. 00:20:23.690 --> 00:20:26.769 Then the median prices began to tick down for 00:20:26.769 --> 00:20:30.730 the first time in years. Confidence just plunged. 00:20:31.069 --> 00:20:33.650 There was a Fortune magazine article in May 2006 00:20:33.650 --> 00:20:36.390 that really called it, didn't it? The great housing 00:20:36.390 --> 00:20:39.049 bubble has finally started to deflate. By that 00:20:39.049 --> 00:20:41.029 point, it was becoming undeniable in the data, 00:20:41.069 --> 00:20:43.210 even if the general public hadn't fully panicked 00:20:43.210 --> 00:20:44.730 yet. And this is where we see that neighborhood 00:20:44.730 --> 00:20:46.970 effect you mentioned earlier. I found this part 00:20:46.970 --> 00:20:48.750 of the reading really fascinating because it 00:20:48.750 --> 00:20:51.210 explains why I should care about my neighbor's 00:20:51.210 --> 00:20:53.750 finances. This comes from the insights of a guy 00:20:53.750 --> 00:20:56.630 named John A. Kilpatrick. He pointed out that 00:20:56.630 --> 00:20:58.789 foreclosures are basically contagious. They're 00:20:58.789 --> 00:21:01.230 like a virus in a neighborhood. Well, imagine 00:21:01.230 --> 00:21:04.509 you live in a nice neighborhood. You pay your 00:21:04.509 --> 00:21:06.930 mortgage on time. You take care of your lawn. 00:21:07.069 --> 00:21:09.930 You're a good homeowner. But three houses on 00:21:09.930 --> 00:21:12.809 your block go into foreclosure because the owners 00:21:12.809 --> 00:21:15.390 took out those crazy subprime loans they couldn't 00:21:15.390 --> 00:21:19.690 afford. Okay. Those houses sit empty. The lawns 00:21:19.690 --> 00:21:22.589 die. Maybe windows get broken. They eventually 00:21:22.589 --> 00:21:26.059 get sold by the bank at a fire sale price. way 00:21:26.059 --> 00:21:28.559 way below market value right the bank just wants 00:21:28.559 --> 00:21:30.839 to get it off its books exactly Well, when an 00:21:30.839 --> 00:21:33.259 appraiser comes to value your house, what data 00:21:33.259 --> 00:21:35.740 do they use? They use the comps, the recent sales 00:21:35.740 --> 00:21:37.559 on your street. So because your neighbors went 00:21:37.559 --> 00:21:40.859 bust, your property value drops by 10 % to 20%. 00:21:40.859 --> 00:21:43.259 So my innocent house takes a huge hit just by 00:21:43.259 --> 00:21:46.019 proximity. Exactly. You lose tens of thousands 00:21:46.019 --> 00:21:47.579 of dollars in equity because your neighbor walked 00:21:47.579 --> 00:21:50.140 away. Yeah. It creates a death spiral for a neighborhood. 00:21:50.380 --> 00:21:52.420 And this started happening everywhere in 2007. 00:21:52.740 --> 00:21:55.240 And then the subprime mortgage industry, the 00:21:55.240 --> 00:21:57.700 very engine of this whole thing, it just imploded. 00:21:57.859 --> 00:22:01.670 March 2007. That's when the dam broke. The high 00:22:01.670 --> 00:22:03.549 foreclosure rates meant these lenders weren't 00:22:03.549 --> 00:22:05.809 getting paid. Companies like New Century Financial, 00:22:06.109 --> 00:22:08.769 which was a huge player, saw their stock plunge 00:22:08.769 --> 00:22:12.440 84 % and filed for Chapter 11 bankruptcy. And 00:22:12.440 --> 00:22:14.299 this started to spill over into Wall Street, 00:22:14.400 --> 00:22:16.200 right? Because these weren't just local lenders. 00:22:16.240 --> 00:22:18.259 They were funded by the big investment banks. 00:22:18.420 --> 00:22:21.960 Oh, it did. Big time. Bear Stearns had two huge 00:22:21.960 --> 00:22:24.599 hedge funds that were heavily invested in subprime 00:22:24.599 --> 00:22:27.380 bets. They lost billions. Bear Stearns tried 00:22:27.380 --> 00:22:30.440 to pledge $3 .2 billion to rescue them. But the 00:22:30.440 --> 00:22:33.279 rot was just too deep. There is a quote here 00:22:33.279 --> 00:22:35.240 that we absolutely have to read. It's from Bill 00:22:35.240 --> 00:22:37.920 Gross of PMCO. Oh, this is a classic. It's an 00:22:37.920 --> 00:22:41.019 all -timer. For context, Bill Gross is the bond 00:22:41.019 --> 00:22:43.819 king, a very serious, very powerful financial 00:22:43.819 --> 00:22:46.019 figure. And he was criticizing the credit rating 00:22:46.019 --> 00:22:48.660 agencies, Moody's and Standard & Poor's. Right. 00:22:48.779 --> 00:22:51.000 These agencies were supposed to be the referees. 00:22:51.119 --> 00:22:54.349 Their job was to read the safety of bonds. AAA 00:22:54.349 --> 00:22:57.009 means super safe, like a government bond. Junk 00:22:57.009 --> 00:22:59.390 means risky. And they were rating these bundles 00:22:59.390 --> 00:23:02.250 of subprime mortgages as AAA. So Bill Gross says. 00:23:02.470 --> 00:23:05.130 He says, talking to the rating agencies, you 00:23:05.130 --> 00:23:08.809 were wooed by the makeup, those six -inch hooker 00:23:08.809 --> 00:23:12.009 heels, and a tramp stamp. Wow. Tell us how you 00:23:12.009 --> 00:23:14.849 really feel, Bill. It is vivid, to say the least. 00:23:14.950 --> 00:23:17.490 But his point was deadly serious. He was saying 00:23:17.490 --> 00:23:19.930 these were not high -class assets. They were 00:23:19.930 --> 00:23:23.359 toxic waste. Those were his words disguised as 00:23:23.359 --> 00:23:25.880 high class, safe investments. And Wall Street 00:23:25.880 --> 00:23:27.859 fell for the disguise because the yields were 00:23:27.859 --> 00:23:30.099 just so sexy. Exactly. They look good on the 00:23:30.099 --> 00:23:31.599 outside, but underneath they were completely 00:23:31.599 --> 00:23:34.160 rotten. Toxic waste is a good transition to the 00:23:34.160 --> 00:23:36.400 fallout because when this stuff exploded, it 00:23:36.400 --> 00:23:39.680 went everywhere. Let's talk about the side effects 00:23:39.680 --> 00:23:41.980 in Section 5. The most immediate impact was on 00:23:41.980 --> 00:23:44.220 the builders. We talked about the boom. You looked 00:23:44.220 --> 00:23:46.460 at a company like D .R. Horton. Massive home 00:23:46.460 --> 00:23:49.799 builder. Their stock went from $3 in 1997 to 00:23:49.799 --> 00:23:54.619 over $42 in 2005. That is just exponential mind 00:23:54.619 --> 00:23:57.339 -bending growth. And in the fall? By August 2007, 00:23:57.700 --> 00:23:59.759 their shares had fallen to one -third of their 00:23:59.759 --> 00:24:02.579 peak levels. The construction industry just ground 00:24:02.579 --> 00:24:05.359 to a halt. Cranes stopped moving. Half -built 00:24:05.359 --> 00:24:08.339 subdivisions were abandoned. Ghost towns. Literal 00:24:08.339 --> 00:24:10.900 ghost towns. But it wasn't just numbers on a 00:24:10.900 --> 00:24:13.619 stock ticker. The source material talks about 00:24:13.619 --> 00:24:17.339 the very real human cost. This is often overlooked 00:24:17.339 --> 00:24:19.880 in these big economic deep dives. We talk about 00:24:19.880 --> 00:24:22.599 billions of dollars, but we forget the stress 00:24:22.599 --> 00:24:24.980 and the anxiety. There is a documented correlation 00:24:24.980 --> 00:24:28.279 between foreclosures and physical illness and 00:24:28.279 --> 00:24:31.700 anxiety. The fear of losing your home is incredibly 00:24:31.700 --> 00:24:34.619 visceral. It's primal. It destroys marriages. 00:24:34.880 --> 00:24:37.339 It destroys health. And it changes the fabric 00:24:37.339 --> 00:24:39.819 of neighborhoods. It does. The sources mention 00:24:39.819 --> 00:24:42.059 increased violence in these unstable neighborhoods. 00:24:42.380 --> 00:24:44.799 When the social fabric of housing breaks down, 00:24:44.920 --> 00:24:47.059 when people are constantly moving in and out 00:24:47.059 --> 00:24:49.690 or houses are just sitting. Empty communities 00:24:49.690 --> 00:24:51.690 destabilize very quickly. Now, one thing that 00:24:51.690 --> 00:24:53.450 always surprises people is how this American 00:24:53.450 --> 00:24:56.390 housing bubble became a global crisis. I mean, 00:24:56.390 --> 00:24:59.250 why did a bad loan in Nevada matter to a bank 00:24:59.250 --> 00:25:01.710 in France? This is the securitization piece we 00:25:01.710 --> 00:25:03.609 hinted at. This is how the virus spread. We've 00:25:03.609 --> 00:25:06.410 got down for us. OK, so a bank in Nevada writes 00:25:06.410 --> 00:25:08.549 a mortgage. In the old days, they would keep 00:25:08.549 --> 00:25:10.089 that mortgage on their books and collect the 00:25:10.089 --> 00:25:12.849 payments for 30 years. Simple enough. But in 00:25:12.849 --> 00:25:15.890 the 2000s, they sold that mortgage to Wall Street. 00:25:16.680 --> 00:25:19.400 Wall Street then took thousands of these mortgages 00:25:19.400 --> 00:25:21.240 from all over the country, put them in a blender 00:25:21.240 --> 00:25:23.740 and created something called a mortgage backed 00:25:23.740 --> 00:25:27.339 security. It's basically a bond that pays you 00:25:27.339 --> 00:25:29.500 money from all those homeowners monthly payments. 00:25:29.960 --> 00:25:32.380 OK, so it's a slice of the pie. Right. And then 00:25:32.380 --> 00:25:34.619 they sold slices of that pie to investors all 00:25:34.619 --> 00:25:37.079 over the world. Pension funds in Norway, banks 00:25:37.079 --> 00:25:40.500 in France, local councils in the UK. Everyone 00:25:40.500 --> 00:25:42.680 wanted a piece because the returns were so good 00:25:42.680 --> 00:25:45.380 and they were rated AAA safe. So when the homeowner 00:25:45.380 --> 00:25:48.630 in Nevada stops paying. The money stops flowing 00:25:48.630 --> 00:25:50.890 to the mortgage -backed security. And suddenly, 00:25:51.049 --> 00:25:54.230 BNP Paribas in France has to suspend three of 00:25:54.230 --> 00:25:56.589 its funds because they can't value their assets 00:25:56.589 --> 00:25:58.990 anymore. They're exposed to U .S. subprime mortgages, 00:25:59.029 --> 00:26:01.089 and they don't even know how much. And Norton 00:26:01.089 --> 00:26:03.390 Rock in the U .K., that was a huge story. That 00:26:03.390 --> 00:26:06.349 was a dramatic scene, a classic 1930s -style 00:26:06.349 --> 00:26:08.710 bank run. People were lining up around the block 00:26:08.710 --> 00:26:10.930 to pull their money out. They had a panic withdrawal 00:26:10.930 --> 00:26:13.869 of £2 billion in just three days. Because they 00:26:13.869 --> 00:26:16.019 thought the bank was insolvent. And it effectively 00:26:16.019 --> 00:26:18.980 was. It had a liquidity crisis. The European 00:26:18.980 --> 00:26:21.960 Central Bank had to step in with nearly 100 billion 00:26:21.960 --> 00:26:25.079 euros in emergency credit just to keep the gears 00:26:25.079 --> 00:26:27.119 of the whole system from grinding to a halt. 00:26:27.259 --> 00:26:29.640 It really shows that the U .S. didn't just have 00:26:29.640 --> 00:26:32.619 a bubble. We exported this toxic waste globally. 00:26:32.819 --> 00:26:35.240 We did. We exported the bubble and then we exported 00:26:35.240 --> 00:26:38.279 the crash. So the world is on fire. Enter the 00:26:38.279 --> 00:26:42.089 government. Section six, the response. The scale 00:26:42.089 --> 00:26:44.430 of the intervention was just unprecedented. In 00:26:44.430 --> 00:26:47.990 2008 alone, the government allocated over $900 00:26:47.990 --> 00:26:51.930 billion to special loans and rescues. $900 billion. 00:26:52.029 --> 00:26:53.869 And that was back when a billion dollars still 00:26:53.869 --> 00:26:56.289 sounded like a lot of money. Right. Before trillion 00:26:56.289 --> 00:26:58.930 became the new normal. And a huge chunk of this 00:26:58.930 --> 00:27:01.390 went to Fannie Mae and Freddie Mac. These are 00:27:01.390 --> 00:27:03.630 the government -sponsored enterprises, the GSEs 00:27:03.630 --> 00:27:05.670 we mentioned. Now, there is a real irony here, 00:27:05.730 --> 00:27:07.910 right? Because earlier you said their execs were 00:27:07.910 --> 00:27:10.069 denying the bubble and ignoring their own risk 00:27:10.069 --> 00:27:12.920 officer. The irony is that while they needed 00:27:12.920 --> 00:27:15.019 saving because their market share was so huge 00:27:15.019 --> 00:27:17.559 that their failure was unthinkable, their actual 00:27:17.559 --> 00:27:20.160 mortgages performed better than the private sector 00:27:20.160 --> 00:27:23.279 subprime loans. They had slightly better standards 00:27:23.279 --> 00:27:26.019 than the wildest subprime lenders. But they were 00:27:26.019 --> 00:27:29.200 still too big to fail. Exactly. If they went 00:27:29.200 --> 00:27:31.500 down, the entire U .S. housing market would simply 00:27:31.500 --> 00:27:34.180 cease to exist. So the government took them over, 00:27:34.259 --> 00:27:36.680 put them into conservatorship. Ultimately, they 00:27:36.680 --> 00:27:38.299 were delisted from the New York Stock Exchange 00:27:38.299 --> 00:27:42.529 in 2010. And amidst all this chaos, we have the 00:27:42.529 --> 00:27:46.210 maestro Alan Greenspan looking back at his handiwork. 00:27:46.430 --> 00:27:49.730 The mea culpa. Post -crash, Greenspan had to 00:27:49.730 --> 00:27:52.269 testify before Congress, and he admitted he didn't 00:27:52.269 --> 00:27:55.750 get it until late 2005 or 2006. He found a flaw 00:27:55.750 --> 00:27:58.519 in his ideology. Didn't get it. That is a tough 00:27:58.519 --> 00:28:00.519 thing to hear from the guy who is in charge of 00:28:00.519 --> 00:28:03.599 the entire economy. He faced heavy, heavy criticism. 00:28:03.740 --> 00:28:05.440 He had encouraged people to take out adjustable 00:28:05.440 --> 00:28:07.460 rate mortgages, telling them it was a good idea 00:28:07.460 --> 00:28:09.799 right before rates were about to rise. And he 00:28:09.799 --> 00:28:11.920 vehemently opposed the regulation of derivatives. 00:28:12.259 --> 00:28:14.380 Derivatives being those side bets on the mortgages. 00:28:14.680 --> 00:28:17.680 Right. The credit default swaps. He fought to 00:28:17.680 --> 00:28:19.980 keep that market unregulated and in the dark. 00:28:20.099 --> 00:28:22.839 And that unregulated market is what blew up and 00:28:22.839 --> 00:28:25.259 took down the global financial system. And politically, 00:28:25.440 --> 00:28:28.319 this was just a mess. You had... Democrats like 00:28:28.319 --> 00:28:31.319 Senator Schumer proposing bailouts to save homeowners, 00:28:31.680 --> 00:28:34.599 arguing it was a humanitarian necessity. And 00:28:34.599 --> 00:28:36.380 then the counter argument from the other side 00:28:36.380 --> 00:28:39.779 was the moral hazard argument. Explain moral 00:28:39.779 --> 00:28:42.420 hazard for us. It's the idea that if you bail 00:28:42.420 --> 00:28:44.599 out people who made bad financial decisions, 00:28:44.799 --> 00:28:47.819 you just encourage more bad decisions in the 00:28:47.819 --> 00:28:50.500 future. If I go to a casino and gamble and lose 00:28:50.500 --> 00:28:52.859 and you give me my money back, well, I'm just 00:28:52.859 --> 00:28:55.099 going to gamble again. bigger next time. It's 00:28:55.099 --> 00:28:57.240 the age old debate. But while they were debating, 00:28:57.380 --> 00:28:59.920 the Treasury secretary at the time, Henry Paulson, 00:29:00.019 --> 00:29:02.579 called the bubble the most significant risk to 00:29:02.579 --> 00:29:05.299 our economy. They had to act. They had to. The 00:29:05.299 --> 00:29:07.279 alternative was a total collapse of the banking 00:29:07.279 --> 00:29:09.279 system. The ATMs would have literally stopped 00:29:09.279 --> 00:29:12.460 working. So the dust settles. We enter the Great 00:29:12.460 --> 00:29:15.819 Recession. But eventually things recover. Or 00:29:15.819 --> 00:29:18.400 do they? Let's talk about the long term correction 00:29:18.400 --> 00:29:20.740 in Section 7. This is where the numbers can be 00:29:20.740 --> 00:29:23.759 really deceiving. If you look at nominal prices, 00:29:23.920 --> 00:29:27.400 just the raw price tag on the house, by mid -2016, 00:29:27.640 --> 00:29:31.240 we were back near the 2006 peak. OK, so 10 years 00:29:31.240 --> 00:29:34.539 to get back to even. Anomaly. But if you adjust 00:29:34.539 --> 00:29:38.019 for inflation, in 2016, real prices were still 00:29:38.019 --> 00:29:40.980 20 % below the peak. Wow. So even a full decade 00:29:40.980 --> 00:29:43.380 later, in real terms, homeowners were significantly 00:29:43.380 --> 00:29:46.039 poorer than they were in 2006. Exactly. That 00:29:46.039 --> 00:29:48.740 is a massive amount of lost wealth, a deckard 00:29:48.740 --> 00:29:50.980 of complete stagnation for the middle classes. 00:29:51.359 --> 00:29:53.920 main asset. And what about liquidity? Did people 00:29:53.920 --> 00:29:57.299 learn to save more after this trauma? Not necessarily. 00:29:57.400 --> 00:30:00.279 The crisis destroyed savings. A University of 00:30:00.279 --> 00:30:02.920 Michigan study from 2009 to 2011 showed that 00:30:02.920 --> 00:30:04.619 while the number of people behind on their mortgage 00:30:04.619 --> 00:30:07.220 payments dropped slightly, liquidity just vanished. 00:30:07.319 --> 00:30:09.920 Meaning cash on hand, savings. Right. In 2011, 00:30:10.059 --> 00:30:12.640 nearly a quarter of American families, 23 .4%, 00:30:12.640 --> 00:30:15.660 had no liquid assets. Zero. Zero. Not a dollar 00:30:15.660 --> 00:30:17.920 in savings. They were house poor or just poor. 00:30:18.059 --> 00:30:20.160 The cushion was completely gone. If the car broke 00:30:20.160 --> 00:30:22.619 down, if someone got sick. They were done. So 00:30:22.619 --> 00:30:24.799 what does this all mean? We've walked through 00:30:24.799 --> 00:30:27.660 the anatomy, the causes, the denial, the spectacular 00:30:27.660 --> 00:30:31.339 crash, and the long, painful fallout. When you 00:30:31.339 --> 00:30:34.220 step back and look at this mother of all bubbles, 00:30:34.460 --> 00:30:38.000 what is the big takeaway for you? I think it 00:30:38.000 --> 00:30:40.240 highlights the extreme danger of groupthink. 00:30:40.680 --> 00:30:43.859 The danger of that phrase, this time is different. 00:30:44.259 --> 00:30:47.119 You had smart people. powerful people looking 00:30:47.119 --> 00:30:49.140 at a chart that was going completely vertical 00:30:49.140 --> 00:30:51.680 and convincing themselves it was a staircase 00:30:51.680 --> 00:30:54.259 to heaven. And actively dismissing the historical 00:30:54.259 --> 00:30:56.640 data that said otherwise. Exactly. The illusion 00:30:56.640 --> 00:30:59.299 of wealth, that ATM effect we talked about, was 00:30:59.299 --> 00:31:02.220 so powerful, so seductive, that no one wanted 00:31:02.220 --> 00:31:04.400 to turn it off. Everyone was making money, from 00:31:04.400 --> 00:31:06.680 the realtor to the banker to the homeowner. No 00:31:06.680 --> 00:31:08.099 one wanted to be the one to turn on the lights 00:31:08.099 --> 00:31:10.299 and end the party. It's a really sobering lesson. 00:31:10.480 --> 00:31:12.579 But here is my final question for you. We look 00:31:12.579 --> 00:31:15.279 back at 2006 and say, how could they not see 00:31:15.279 --> 00:31:17.220 it? It was so obvious. Hindsight is always 20 00:31:17.220 --> 00:31:19.519 -20, isn't it? Right. So connect this to the 00:31:19.519 --> 00:31:22.400 bigger picture for us. Are we safe now or could 00:31:22.400 --> 00:31:24.900 this happen again? Well, economies are cyclical. 00:31:25.059 --> 00:31:27.940 That is the one constant. And if bubbles are 00:31:27.940 --> 00:31:30.319 only definitively identified in hindsight, as 00:31:30.319 --> 00:31:32.400 our source material suggests, then it raises 00:31:32.400 --> 00:31:35.539 a very provocative thought. Are we standing in 00:31:35.539 --> 00:31:38.000 froth right now without knowing it? That is a 00:31:38.000 --> 00:31:41.079 scary thought. Look at the current sure thing 00:31:41.079 --> 00:31:43.720 investments. Maybe it's not housing this time. 00:31:43.779 --> 00:31:45.680 Maybe it's tech stocks. Maybe it's crypto. Maybe 00:31:45.680 --> 00:31:48.640 it's AI. Look at the assets that everyone believes 00:31:48.640 --> 00:31:52.099 only go up and ask yourself, are you looking 00:31:52.099 --> 00:31:54.660 at the fundamentals or are you just being wooed 00:31:54.660 --> 00:31:57.630 by the six inch hooker heels? A fantastic callback 00:31:57.630 --> 00:32:00.630 to Bill Gross. It is the essential question because 00:32:00.630 --> 00:32:03.250 the housing market of 2005 looked like the safest, 00:32:03.430 --> 00:32:06.710 most solid bet in the entire world until the 00:32:06.710 --> 00:32:09.109 day it wasn't. On that cheery note, we will leave 00:32:09.109 --> 00:32:11.809 you to audit your own portfolio. Thank you for 00:32:11.809 --> 00:32:14.329 listening to this deep dive into the 2000s housing 00:32:14.329 --> 00:32:16.450 bubble. Always a pleasure. See you next time.