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Background
I have done extensive research into the 2007-08 Subprime mortgage crises in America, which led to a worldwide financial collapse that bankrupted 4 countries. I was much too young to have any of my skin in the game, but I know my folks were affected by it. The crisis WAS entirely avoidable, but as the video went into, federal policy really screwed everyone. People are supposed to be saving their income for times when the economy goes down, yet due to extremely low-interest rates, people could spend much more than they should have felt comfortable doing. The fed just kept pumping money into the financial markets, a lot like they have been doing since the first COVID payments!
Subprime Mortgages
As the video touched on, right when the financial crises happened, roughly HALF of ALL mortgages were subprime or risky. That sounds like complete lunacy, and don’t get me wrong it is, but the reason why it happened made so much sense. Fannie Mae and Freddie Mac had bought over 1 trillion dollars worth of these garbage loans by 2002. They were encouraged to keep lending to riskier and riskier buyers, all under the ASSUMPTION that if it all blew up the US Government would bail them out. Who encouraged this risky behavior? Well, the very people in Washington who were touting that the housing system was very strong and for people to keep buying homes. Another issue was with the CRA and Affordable Housing Act. What did these do? Well, essentially it was the government telling the banks and mortgage lenders that if they did not give mortgages to people of a certain race, they’d get fined. It did not matter that the vast majority of these people were completely unqualified to have a mortgage, the banks would get penalized if they did not hand them out anyway. So what’d they do? Hand out mortgages riskier than they have ever been.
How Banking in America Works
Fractional Reserve Banking is generally a good idea. But only to a certain extent. Banks in 2007 were told to keep roughly 10% of deposits on hand. That’s right. If you deposited $1,000 into a bank and went to take it out, they’d probably only have $100 to give you and then they’d shrug and say “Well it will be paid back by the FDIC”. Loaning out money is a good plan, but ONLY when it is done under actual capitalism. When banks have the ability to actually fail, they’ll be safer with their investments. Of course, as I’ve written above, safety had been thrown out the window long before the meltdown. I can see an argument that a fractional percentage of 75% is actually good for the economy because then banks have money to loan out. They’d just have to be much more selective in who or what they give, and for some reason this is seen as a bad thing.
Parallels with the Great Depression
The parallels with the great depression are quite striking. First, there was the mini depression of 1920-21, but the Fed and the government sat on their hands and what do yah know, the free market stabilized and began to grow. Then, in 1929 in the face of another economic downturn, instead of doing what had worked, Hoover decided to use the power of the government to force the economy out of recession. He injected money not into the banks, but by doing massive public works projects and at the same time raising taxes. The Great Depression involved low-interest rates and an economy that needed an adjustment, much like the 08 Crises. Hoover's policies did not work, as when he left office ¼ Americans were unemployed.
FDR to the moon!
Thought Hoover was bad? Meet the mother of all power-hungry douches, FDR. Pardon my language, but I really just can’t get over how much of a right idiot this guy was. He wanted to print more money in order to try and prop up the economy (even though that didn’t work the last 4 years under Hoover) but he was being stopped by the pesky thing called the Gold Standard. So, instead of going through real legislation and inevitably getting shot down, he just decided to sign an executive order changing the way money was backed OFF of the gold standard and onto, well, nothing? He made owning any substantial amount of gold illegal (in order to take in as much as possible) and decided that to set the price of gold that job went to himself and the secretary of the treasury. Did his golden plan work? NO, the only reason America was lifted from the depression was because of WW2, yet for some reason, FDR is given credit for the recovery! All he did was completely screw over subsequent generations of Americans and set precedents that are STILL screwing us over to this day. Yes, unemployment fell during WW2, but that is because it HAD to as our government shipped millions of men off to war and then had millions of women join the workforce. Even less fun? You could no longer bargain with your employer, you really did not have the freedom to leave your job, and farm prices were not set to a competitive market price. All of this was under the “great” leadership of FDR. Then, they signed the Berton Woods agreement, essentially allowing other countries to turn in their dollars for gold, but not allowing Americans to. This had the effect of other countries greatly trusting the US dollar and it became the standard for global trade. America in general could not inflate the budget too much for fear the system would collapse if someone drew the curtain back. All was alright, right up until August of 1971.
Nixon
President Nixon decided his great idea was to undue 20+ years of the Bretton Woods system with you guessed it another executive order. For some reason, it was believed that doing so would actually deflate the price of gold and increase the US dollar, which would now be backed entirely by nothing. Instead, gold more than tripled in price and the US dollar lost purchasing power. Undeterred, Nixon’s administration and all subsequent admins had the green light to print as much as possible. No checks, no balances, and this increased when Greenspan became the chair of the Fed and his policy was to bail out any failing businesses, encouraging risky behavior. This all came crashing down in 08. Or did it?
The CDO and Tranches
I thought the video did a pretty good job of showcasing the issues with the US market, and I actually really enjoyed the history of WHY we got there, but it missed 2 super crucial parts of the collapse. One was this beautiful instrument called a CDO, or a “collateralized debt obligation”. Essentially, it was made up of all the garbage banks couldn’t sell in normal MBS and they’d just repackage it and sell it as an entirely new investment. They were made almost entirely of BBB tranches of mortgages or the swill of the swill. At the time it all collapsed, there was roughly $1.4 trillion of these make-believe products in circulation. But, one more instrument existed that really screwed everyone including other countries, which was the SYNTHETIC CDO. This was essentially a bet that the “underlying” asset, in this case a CDO, would NOT default. It was a bet that things would keep going well. It’s value at the time of the collapse has been estimated at roughly $5 trillion. $77 trillion worth of money was in the global financial markets, and all of it was under the assumption that if it all blew up, the Fed would bail everyone out. This is how other countries got brought down when our bubble collapsed. Synthetic CDO’s became almost entirely worthless overnight, while the CDO market was reduced to only $2 billion in 2010. This is where banks like Merril Lynch, Bear Stearns, and Lehman lost billions gambling on CDO’s. Only 1 poor soul went to jail too. The government continues to increase the money supply and as I see it, there is only one way it ends. A great depression style ending.
