The Global Financial Crisis, Part 1: The Housing Bubble

In this episode, we tell the story of the modern mortgage market, how Wall Street financialized it, and how easy credit inflated one of the biggest bubbles in American history. A bubble that, when it finally popped, nearly brought down the entire global financial system.

The housing bubble left scars, changed institutions, and shaped the economy we live in today. It’s impossible to understand the social and economic forces in the 2010s and 2020s without first studying the Global Financial Crisis. At the root of the crisis was a nation-wide housing bubble.

In Part 1 of this two-part series, we cover how The New Deal completely restructured the US mortgage industry. We discuss how homeownership became a critical part of the American dream fueled by an abundance of credit and bipartisan support for homeownership—especially after World War II.

We touch on the evolution of mortgages—from local banks that relied on personal relationships to global giants driven by the forces of globalization and financial deregulation in the 1980s and 1990s.

By the early 2000s, homeownership was at record highs. Credit was cheap. Profits at mortgage originators and banks were at record levels. At the center of the boom was the mortgage market and the flawed assumption that housing prices never go down.

Chapters:

(01:28) Setting the Scene

(03:17) Market Backdrop

(10:39) History of Mortgages, Fannie, and Freddie

(24:11) Mortgage-Backed Securities (MBS)

(30:40) MBS and Rating Agencies

(43:31) Collateralized Mortgage Obligations and Flaws in the Mortgage Market

(51:24) Mortgage Originators and Subprime

(56:08) The Global Savings Glut, Interest Rates, and Commodity Supercycle

(01:06:56) Mortgage Originators Get Big

(01:14:41) Fed Policy and Interest Rates

(01:19:00) Explosive Growth in Subprime

(01:26:20) The Housing Bubble Inflates

(01:33:53) State of the Market at the End of 2006

References:

The Great American Housing Bubble: What Went Wrong and How We Can Protect Ourselves in the Future by Adam J. Levitin, Susan M. Wachter

All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joe Nocera

Panic: The Betrayal of Capitalism by Wall Street and Washington by Andrew Redleaf and Richard Vigilante

The Big Short: Inside the Doomsday Machine by Michael Lewis (and the movie)

On the Brink: Inside the Race to Stop the Collapse of the Global Financial System by Henry Paulson

Too Big to Fail by Andrew Ross Sorkin (and the movie)

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett

The Courage to Act: A Memoir of a Crisis and Its Aftermath by Ben Bernanke

Firefighting: The Financial Crisis and Its Lessons by Ben Bernanke, Hank Paulson, and Timothy Geithner

The Rise and Fall of Bear Stearns by Alan Greenberg and Mark Singer

PBS Frontline Documentary: The Warning

PBS Frontline Documentary: Money, Power and Wall Street

Lectures by Ben Bernanke at Georgetown (link)

Warren Buffett on Derivatives (2002 Shareholder Letter)

Warren Buffett Interview with Andrew Ross Sorkin (Ten Year Anniversary Special from CNBC)

Reports by the Financial Crisis Inquiry Commission (main report, HHT dissent, Wallison dissent)