The 2008 Financial Crisis: Crash Course Economics #12


Jacob: Welcome to Crash Course Economics.
My name is Jacob Clifford. Adrienne: And I’m Adrienne Hill. And today
we’re going to do something a little different. We’re going to explore one moment in history
in depth. We’re going to talk about how the 2008 Financial Crisis happened and the government
response to it in the United States. Jacob: So let’s get started. [Theme Music] Jacob: The 2008 Financial Crisis was a big
deal. Ben Bernanke said it could have resulted in a 1930s style global financial and economic
meltdown with catastrophic implications. But what happened? Why did it happen? And why
aren’t we all huddled around burning trash cans forming a raiding party to go steal gas
from other tribes in the wasteland? By the way, if you’re actually doing that,
you probably didn’t hear we survived the financial crisis. Things got better. Seriously. Put
down your crossbows. Adrienne: To explain what happened, first
we have to do a quick explainer about mortgages. And you might already know this, but basically
someone that wants to buy a house will often borrow hundreds of thousands of dollars from
a bank. In return, the bank gets a piece of paper, called a mortgage. Every month, the homeowner has to pay back
a portion of the principle, plus interest, to whomever holds the piece of paper. If they
stop paying, that’s called a default. And whomever holds that piece of paper gets the
house. The reason I’m saying whomever holds the paper,
rather than the bank, is because the bank, the original lender, often sells that mortgage
to some third party. And the reason I say often is because this happens all the time.
I’ve had my house for nine months, and three different banks have had the mortgage. Traditionally, it was pretty hard to get a
mortgage if you had bad credit or didn’t have a steady job. Lenders just didn’t want to
take the risk that you might “default” on your loan, but all that started to change
in the 2000s. And before we go further, a quick aside here.
The story gets complicated fast, and it’s a fascinating story. But we’re trying to keep
it relatively simple. So, I’ve asked Stan if we could put some additional resources in the YouTube
description. And Stan said “Yes.” Thanks Stan! Anyway, back to our story. In the 2000s, investors
in the U.S. and abroad looking for a low risk, high return investment started throwing their
money at the U.S. housing market. The thinking was they could get a better return from the
interest rates home owners paid on mortgages, than they could by investing in things like Treasury
Bonds, which were paying very, very low interest. But big money, global investors didn’t want
to just buy up my mortgage, and Stan’s mortgage. It’s too much hassle to deal with us as individuals.
I mean, we’re pains. Instead, they bought investments called mortgage backed-securities.
Mortgage backed-securities are created when large financial institutions securitize mortgages.
Basically, they buy up thousands of individual mortgages, bundle them together, and sell
shares of that pool to investors. Investors gobbled these mortgage backed-securities
up. Again, they paid a higher rate of return than investors could get in other places and
they looked like really safe bets. For one, home prices were going up and up. So lenders
thought, worse case scenario, the borrower defaults on the mortgage, we can just sell
the house for more money. At the same time, credit ratings agencies
were telling investors these mortgage backed-securities were safe investments. They gave a lot of
these mortgage backed-securities AAA Ratings–the best of the best. And back when mortgages
were only for borrowers with good credit, mortgage debt was a good investment. Anyway, investors were desperate to buy more
and more and more of these securities. So, lenders did their best to help create more
of them. But to create more of them, they needed more mortgages. So lenders loosened
their standards and made loans to people with low income and poor credit. You’ll hear these
called sub-prime mortgages. Eventually, some institutions even started
using what are called predatory ending practices to generate mortgages. They made loans without
verifying income and offered absurd, adjustable rate mortgages with payments people could afford
at first, but quickly ballooned beyond their means. But these new sub-prime lending practices
were brand new. That meant credit agencies could still point to historical data that
indicated mortgage debt was a safe bet. But it wasn’t. These investments were becoming
less and less safe all the time. But investors trusted the ratings, and kept
pouring in their money. Traders also started selling an even riskier
product, called collateralized debt obligations, or CDOs. And again, some of these investments
were given the highest credit ratings from the ratings agencies, even though many of
them were made up of these incredibly risky loans. While, the investors and traders and bankers
were throwing money into the U.S. housing market, the U.S. price of homes was going
up and up and up. The new lax lending requirements and low interest rates drove housing prices
higher, which only made the mortgage backed securities and CDOs seem like an even better
investment. If the borrowers defaulted, the bank would still have this super valuable house, right?
No. Wrong. Let’s go to the Thought Bubble. Actually, let’s go to the Housing Bubble.
You remember bubbles, right? Rapid increases, driven by irrational decisions. Well, this
was a bubble, and bubbles have an annoying tendency to burst. And this one did. People
just couldn’t pay for their incredibly expensive houses, or keep up with their ballooning mortgage
payments. Borrowers started defaulting, which put more
houses back on the market for sale. But there weren’t buyers. So supply was up, demand was
down, and home prices started collapsing. As prices fell, some borrowers suddenly had
a mortgage for way more than their home was currently worth. Some stopped paying. That
led to more defaults, pushing prices down further. As this was happening, the big financial institutions
stopped buying sub-prime mortgages and sub-prime lenders were getting stuck with bad loans.
By 2007, some really big lenders had declared bankruptcy. The problems spread to the big
investors, who’d poured money into these mortgage backed securities and CDOs. And they started
losing money on their investments. A bunch of money. But wait. There’s more. There was another financial instrument that
financial institutions had on their books that exacerbated all of these problems–unregulated,
over-the-counter derivatives, including something called credit default swaps, that were basically
sold as insurance against mortgage backed securities. Does AIG ring a bell? It sold tens of millions
of dollars of these insurance policies, without money to back them up when things went wrong.
And as we mentioned, things went terribly wrong. These credit default swaps were also
turned into other securities — that essentially allowed traders to bet huge amounts of money on whether
the values of mortgage securities would go up or down. All these bets, these financial instruments,
resulted in an incredibly complicated web of assets, liabilities, and risks. So that
when things went bad, they went bad for the entire financial system. Thanks Thought Bubble. Some major financial players declared bankruptcy,
like Lehman Brothers. Others were forced into mergers, or needed to be bailed out by the
government. No one knew exactly how bad the balance sheets at some of these financial
institutions really were–these complicated, unregulated assets made it hard to tell. Panic set in. Trading and the credit markets
froze. The stock market crashed. And the U.S. economy suddenly found itself in a disastrous
recession. Jacob: So what did the government do? Well,
it did a lot. The Federal Reserve stepped in and offered to make emergency loans to
banks. The idea was to prevent fundamentally sound banks from collapsing just because their
lenders were panicking. The government enacted a program called TARP, the troubled assets
relief program, and which the rest of us call the bank bailout. This initially earmarked
$700 billion to shore up the banks. It actually ended up spending $250 billion bailing out
the banks, and was later expanded to help auto makers, AIG, and homeowners. In combination with lending by The Fed, this
helped stop the cascade of panic in the financial system. The treasury also conducted stress
tests on the largest Wall Street banks. Government accountants swarmed over bank balance sheets
and publicly announced which ones were sound and which ones needed to raise more money.
This eliminated some of the uncertainties that had paralyzed lending among institutions. Congress also passed a huge stimulus package
in January 2009. This pumped over $800 billion into the economy, through new spending and
tax cuts. This helped slow the free fall of spending, output and employment. Adrienne: In 2010, Congress passed a financial
reform, called the Dodd-Frank law. It took steps to increase transparency and prevent
banks from taking on so much risk. Dodd-Frank did a lot of things. It set up a consumer
protection bureau to reduce predatory lending. It required that financial derivatives be
traded in exchanges that all market participants can observe. And it put mechanisms in place for
large banks to fail in a controlled predictable manor. But, there’s no consensus on whether this
regulation is enough to prevent future crises. Jacob: So, what have we learned from all this?
Well, one key factor that led to the 2008 financial crisis was perverse incentives.
A perverse incentive is when a policy ends up having a negative effect, opposite of what
was intended. Like, mortgages brokers got bonuses for lending out more money, but that encouraged
them to make risky loans, which hurt profits in the end. That leads us to moral hazard. This is when
one person takes on more risk, because someone else bears the burden of that risk. Banks and lenders
were willing to lend to sub-prime borrowers because they planned to sell mortgages to somebody else.
Everyone thought they could pass the risk up the line. The phrase “too big to fail” is a perfect example
of moral hazard. If banks know that they’re going to be bailed out by the government, they
have incentive to make risky, or perhaps unwise bets. Former Fed Chairman, Alan Greenspan
summed it up really nicely when he said, “If they’re too big to fail, they’re too big.” Adrienne: When something terrible happens,
people naturally look for someone to blame. In the case of the 2008 financial crisis,
no one had to look very far because the blame and the pain was spread throughout
the U.S. economy. The government failed to regulate and supervise
the financial system. To quote the bi-partisan, financial crisis inquiry commission report,
“the sentries were not at their posts, in no small part due to the widely accepted faith
in the self-correcting nature of the markets, and the ability of financial institutions
to effectively police themselves.” The report placed some of the blame on the
years of deregulation in the financial industry. And blamed regulators themselves for not doing
more. The financial industry failed. Everyone in the system was borrowing too much money
and taking too much risk, from the big financial institutions to individual borrowers. The
institutions were taking on huge debt loads to invest in risky assets. And huge numbers of home
owners were taking on mortgages they couldn’t afford. But the thing to remember about this massive
systemic failure, is that it happened in a system made up of humans, with human failing.
Some didn’t understand what was happening. Some willfully ignored the problems. And some
were simply unethical, motivated by the massive amounts of money involved. I think we should give the last word today
to the financial crisis inquiry commission report. To paraphrase Shakespeare, they wrote,
“The fault lies not in the stars, but in us.” Thanks for watching. Crash Course Economics is made with the help
of all of these nice people. We’re able to stave off our own financial crisis each month,
thanks to your support at Patreon. You can help keep Crash Course free for everyone,
forever, and get great rewards at patreon.com. And given today’s subject, be exuberant, but
keep it rational.

100 thoughts on “The 2008 Financial Crisis: Crash Course Economics #12”

  1. Sounds very much like Australia right now. Sadly our Goverment plus the Banks are only selling to the people right now that's it's a Great time to buy (Safe as house's). Lot's of heartache, pain & blood in the streets to come.

  2. rating agency were involved in ensuring these mortgage backed asset as AAA.. When it was subprimed. And aig London ceo was involved in credit default swap, who was fired in 2008

  3. Hey it would be very helpful if someone tells me the exact role of the Federal Reserve system in the crisis

  4. This happened before 2008 because people were complaining about president Obama's selecting these crooks into his administration,but suppossingly because of their expertise they were reelected into the Obama administration,Then they finance the crooks and gave them millions of dollars annual fees even to the ones that had to retire because of their criminal activity.The federal Reserve printed the money for them,I assume this what you call residual income,let your money work for you 24 7 even while you sleep.

  5. We didn't used to see rough-sleepers in my home town and now there are many. The crash is still affecting us, it's very sad. Banks do whatever they want and then they get bailed out by the hard working ordinary people… it's so messed up. I wonder how long till the next crash??

  6. they sold 99 cent 2X4 built houses like candy to people that didn't know that the house only cost $8,000 to build we use to build um & the banks would sell um to a Mexican boarder jumpers that couldn't even speak English. these people eat um up. they would pay ah $120 thousand 4 um plus interest.

  7. The very crux of the problem is why did people stop buying houses? I lived through this and this is really the reason. You won’t hear this on The Big Short or anywhere. Lower lax lending requirements and lower interest rates drove the markets higher.

    The main reason people quit buying houses was because of the following:
    1. Ballon mortgages were extremely popular. In these mortgages the payment is extremely low for 1-5 years because you only pay on the interest. But then they readjust to prime rate plus something. This type of loan literally allowed the borrower of a million dollar mortgage to pay 2k/ month payment.
    2. Interest rates were lowered by the fed and requirements to qualify lowered because the demand became greater for more housing debt instruments and the housing market was at a saturation point.
    3. When the fed finally began to raise interest rates the ballon/ interest only mortgages were at the point of coming due for their balloon refinance. They readjusted to a much higher prime rate. The borrowers had to refinance against the mortgage balance not just the interest only. This caused many many people to walk away from their mortgage because they could not refinance because their loan to value ratio made it so upside down the bank wouldn’t refinance, so they walked away and gave the bank the house. People literally had 1million dollar houses financed but would only appraise out at 250k. It made more sense to walk away.

  8. This is inaccurate in several critical and important ways.

    1) Mortgages have been securitized for almost 100 years
    2) AIG wasn't in the CDS business. They provided insurance wraps to mortgage pools and other asset backed securities (that is a technical distinction). Credit default swaps are one of the oldest derivative instruments traded today, used by banks for over 100 years.
    3) Home prices and mortgage levels ballooned due to reductions in lending standards first in GSE lenders like Fannie Mae in the late 90's. Ballooning home prices which started from poor lending standards from agencies with an implied government guarantee pushed underwriting standards down all the way down stream and drove up the price of homes. The repeal of Glass Steagal also compounded the problem, also in the late 90's.
    3) The Federal Reserve pushed interest rates too low for too long in response to temporary economic shocks and benign recessions starting again in the late 90's and artificially low interest rates push home prices higher along with lots of other things.

    Key takeaways:

    1) The lack of mortgage regulation (an express federal government policy implemented in the 90's and continued in the early 2000's to increase home ownership rates) caused lending standards to decline first in GSE's and then downstream in private lenders.

    2) Dangerous monetary policies holding interest rates too low for too long exacerbated the problem.

    3) The end of Glass Steagal which prevented commercial lenders from merging with investment banks gave rise to too much leverage in the financial system creating systemic risk in major financial institutions, in turn triggering government bailouts and artificially low interest rates… Which reinflated an overinflated housing market… Cause, you know, we'll get it right this time…

  9. Hold on, hold on, hold on. How can you sell shares of a pool of mortgages? Isn't it basically a contract between two parties about one party paying rent pluss interest? how can it have a value you sell or buy?

  10. Funny,I've watched a few of these videos and very few tell who's to blame for this.Clinton.The banks made the mistake of letting him push them around.That's one reason I never vote democrat.They're communist.

  11. Forgot the part where democrats called banks racist for not lending to minorities and forced those loans while bragging about it and then called them racist for “predatory loans.”

    Amendments to the cra during the clinton administration caused the crisis, period.

  12. What I remember about the mortgage crisis is the bank taking gobs of money from tarp promising that they would help people stay in their homes and then giving my family and me the runaround for 3 years until Society has moved on to other issues and then foreclosing and getting their money back out of the mortgage insurance so that now instead of living in the house of our dreams we live in a walk-up apartment. Then the bank did nothing with the house and its set empty and deteriorated for three years until finally bandl's came in and burned it to the ground. It was one of the nicest houses in the county. If you're not angry you're not paying attention.

  13. "Things got better". Lol, what the govt did was pushing back and postponing the crysis into another bigger and more dangerous crysis.

  14. Sure glad the so-called economist learned their lesson and it will NEVER happen again…
    No one can that stupid…

  15. Nice, you completely missed the source. It’s like you deliberately left out the fact that the FED caused it

  16. The 2008 US financial crisis resulted to the call center business in the Philippines to explode as US companies outsourced their jobs out here.

  17. During the 2000s you could use stated income for someone with a 640 credit score. Deliver pizzas for 8 bucks an hour? No. You are actually a delivery specialist and you make 80k a year.

  18. Man this sure sounds a lot like our current student loan debt dilemma… Perhaps another bubble just waiting to burst?

  19. You completely left out the community reinvestment act and Bill Clinton's 90's reform that forced banks into subprime against their will. You ultimately don't mention the government is responsible

  20. "Anyway, investors were desperate to buy more and more of these securities… so standards were lowered"… No the federal government incentivized this behavior by subsidizing loans and manipulating the market.

  21. Your content is good, but u speak so fast that I couldn't understand it clearly.. every one can't follow American accent so fast.

  22. 1. People borrow money from banks to buy houses
    2. Banks get “mortgages”
    3. People have to pay every month, plus interest
    4. If they stop paying, its called a “default”
    5. Whoever gets the “default” (a piece of paper), gets the house
    6. Since the bank usually sells the mortgages to 3rd parties, these 3rd parties will get the default
    7. Traditionally, you can’t borrow money if you have bad credit (investors don’t want you to default on your loan)
    8. Investors looking for low-risk, high-returns investments
    9. Home owners had to pay interest rates that were higher than returns from other bonds/investments etc
    10. Hence investors started throwing money into the U.S housing market
    11. But its a hassle for investors to deal with homeowners personally
    12. Banks created “mortgage-backed securities” (thousands of mortgages, bundle them together, sell shares of that pool to investors) — “securitizing”
    13. Banks gave many mortgage-backed securities “AAA ratings”, that homeowners had good credit
    14. Increase in demand for houses, prices kept going up
    15. Hence investors thought it was safe, because if homeowners couldn’t pay up, they can just sell the house for more money!
    16. Investors desperately wanted more of these securities
    17. Banks created more by loosening their standards, even lending to those with poor credit — “subprime mortgages”
    18. Led to “predatory lending practices” — gave loans without even verifying income, absurd adjustable rate mortgages (people could afford at first, but quickly ballooned beyond their means)
    19. “Collateral debt obligations, CDOs”
    20. Price of houses went up so high that nobody could afford them anymore, demand went down and prices crashed
    21. Subprime lenders, investors of mortgage-backed securities and CDOs got stuck with bad loans
    22. “Credit default swaps” — insurance policies sold by AIG etc — allowed traders to bet A LOT of money on whether value of mortgages will go up or down
    23. Markets crashed, U.S went into recession
    24. Govt implemented TARP (Troubled Assets Relief Program) “Bank Bailout”, went through balance sheets to filter out those banks who needed to raise more money
    25. 2009 Congress implemented a stimulus package, tax cuts and increase spending
    26. 2010 Congress implemented Dodd-Frank law: increase transparency & prevent banks from taking excessive risks

    Overall, main causes:
    “perverse incentive” — policy ends up having negative outcomes (opposite of intended outcome)
    “Moral hazard” — banks, traders, investors took on more risks, because someone else will bear the burden of the risk (aka the common folks)

  23. Brothers and Sisters!!! This is the time to stop long work hours we are humans not a bateries which can be discharged and droped like a trash! LETS MAKE AND CONNECT TOGETHER WORLDWIDE MOVEMENT It’s time to switch to a four-day working week!

  24. u know why economical crissis is there bcoz people has not much earning capacity. if employee in india earn 10 k per month what he will buy, if he earn 1 lakh per month he can buy cars so auto industry will benfit and he can buy house or flat or plot so real estate will benifit and he will buy electronic goods so eclectronics industry will benifit for all of this he should take loan. then financial sectors will benifit and he will buy gold, ornaments, mutual funds, shares, insurance policies so respected fields wiil benifit, he will go for tour then tourism and hotel industry will benifit. so finally think crores of wolrd graduates are either unemployed or suffering with underemployment, then what they will buy and how all sectors will benifit due to this all sectors are going down money is not rotating properly. in addition you are talking about artificial intelligence and automation. if all the work in industries, software companies, finance and banking sectors etc and all total sectors get automated then who will buy these products. i think robots will buy, then total economic will drowned completely and as a result stone age will start

  25. If the problem was mortgages, then why were automakers failing?
    The real reason for the crisis was the FED dropping rates to 0 and leaving them there for years. When they tried to normalize rates, they started exposing all that bad credit.

  26. So white people loosing their houses.. blacks dont buy, mexicans will work any job to stay current… i see…. main stream media does nt talk about it..

  27. I use to believe this was un bias video. So help me understand the gov bailed out the banks that regulate the FED which is governed by the banks that failed with the bad loans??? (FMOC) Stan……?!?!? Do better!!!!!! tell the entire story of central banking. Not this BS.

  28. "So what did the government do? The government did a lot" <- makes it sound like the government fixed everything. No, they exacerbated the situation and helped create it in the first place. In the end they stole money from the american people and gave it to their friends the bankers. They failed to set up adequate regulations, and as a result we are presently slipping into another much worse recession. If you or I default on our home loan, nobody will be there to bail you out. But if you're a large corporate conglomerate, you can deliberately defraud millions of people, commit felonies like laundering and funding terrorist groups, run actual ponzi schemes and still the government will resurrect your dying husk of a bankrupt industry and you will even personally profit immensely from it with corporate bonuses and fringe benefits. If you think the previous financial crisis really ended, you haven't researched enough; we are still in it, but we were lied to that things were returning to normal because of quantitative easing, stock buybacks, and fudged economics that only delay the inevitable. Want this to happen again? No? Then buy bitcoin and get the hell out of the broken traditional financial system.

  29. The housing bubble was a farce.
    Had the loan corporations not been saved buy government funding they would have been forced to sell mortgages for fr less than their projected returns which would have given lendees negotiation power and contributed to growth of the up start corporations that were capable of buying those mortgages at lower rates. The giant lending corporations would have lost their position in the market and there would ave been fewer foreclosures.
    The economy would have bounced back faster and the value of U.S currency may have been secured. The bailout secured lending institutions and protected regional monopolies, while suppressing competitors.
    The bailouts did more damage to the economy than can measured as it suppressed opportunities for countless diversified investment.
    It payed for failings of the corporate giants while protecting them from the competition of lower tier corporations.
    No one is too big fail.

  30. They make it so complicated:
    Borrowers where idiots taking loans they could not pay back.
    Bankers loaning out f up loans.
    Goverment no regulation and let it happen.
    end.

  31. Yeah, the otherwise sane banks just started to lend recklessly, without any pressure to do this, because of STUFF! -1 channel to care about. Thanks.

  32. Markets work. This was not Capitalism playing out, this was Corporatism…when Govt't and Companies work hand in hand.
    Predatory Lending Practices occured because of such laws as the Community Reinvestment Act.

  33. Don't the genesis of this recession was caused by the Clinton administration and Alan Greenspan both of whom loosend borrowing rules so more people could get homes.

  34. "The beauty of Capitalism" that people too flattered to admit. But from the death of the involved lending businesses, other opportunist Capitalist scavengers starts gobbling up highly discounted homes. Banks are desperate to recover their losses by selling low or recover none at all.

  35. Good explanation. Very educational. One word, NINJ loans. No income no job. The banks were so sure they could package mortgages they were willing to let anyone get a home, for a buck. The government required good credit.

  36. Keep doing it, I’m studying about Economics right now. I have been learning y’all stuff when I was a student in the state back in 2015. Please keep doing a good content about economics and real estate and any others.

    Sincerely,
    Cereal killer

  37. Greed almost tanked America. No fixed rates, false securities backings and money hungry financial institutions. AIG got a slap on the wrist for not securing their bonds 🤦🏽‍♂️🤨

  38. As someone who ended up short selling his home, here some advice. Don't buy when everyone is buying. And never buy what you can't afford. Trust your gut. It's a 90 day process and a hundred some pages of documents. Anytime your gut says bail, bail. Screw the escrow, screw the realitors feelings, screw everything. If prices are flying up, don't buy. Rent. Or move somewhere. If you do end up buying and have to sell. It's not the end of the world. Sell it. Short sell. Foreclose. Life goes on.

  39. It's funny how when anyone proposes tighter regulation, the financial services industry starts shouting about 'socialism'. And yet they only exist because their government bailed them out with trillions of $$$ of taxpayers money. Wtf was that, rugged individualism?

  40. It would be refreshing if Americans acknowledged that this was a GOBAL Financial Crisis, which impacted people everywhere around the planet, and they learned about the impacts that their economy’s mistakes caused for the rest of the world.

  41. Effectively stealing from the poor and destroying the housing market so that younger generation cannot own homes. This is the American standard.

  42. Good explanation, but you forgot to mention how the crash trickled down to many employers, who this didn't affect, using the crash as an excuse to freeze hiring, laying off people and even lowering pay scales, which hasn't risen yet – 11 yrs later. I and many others watched this, up close and personally. Did we really survive it or just bail out banks? The rich get richer and the rest of us get poorer. Talk about unethical. I still shake my head at people who get ARM loans.

  43. Hey, just curious, what happened to the loans provided to the people who defaulted as a result of which the banks collapsed, are those people still in debt after the bailout given by the government or did their loans got settled??

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