This is a really interesting article arguing that the 2008 economic crisis was not caused by cheap credit or foreign capital inflows but rather overtightening of lending standards for homebuyers. Please, do read

[u/technocraticnihilist]

https://kevinerdmann.substack.com/p/when-we-lost-our-minds

[u/SnooChipmunks4208]

Subprime mortgages mean like All-NBA Second team right?

[u/technocraticnihilist → u/SnooChipmunks4208]

what do you mean?

[u/SnooChipmunks4208 → u/technocraticnihilist]

Worse than Lebron, but better than Paul George.

[u/az78 → u/SnooChipmunks4208]

Subprime means more like Bronny than LeBron.

The bubble happened because it was in too many peoples' financial self-interest to believe that Bronny was as good as LeBron.

[u/deadcactus101]

I read the whole damn thing and I am not certain I completely follow his logic. The standard explanation for the recession in my mind is as follows:

1. Cheap credit, loose lending, and deregulation led to inflated home prices.
2. When interest rates rose, it became clear that many of the home loans were bad and would default
3. When people started to default on their mortgages home prices and the value of the loans backing them fell
4. Because the finance industry was so invested in CDOs and other derivatives of the mortgages the finance industry nearly collapsed as well
5. Banks tightened their lending to decrease risk as they grappled with the losses from mortgage defaults.
6. The rest of the economy suffered due to cascading effects of banks tightening their lending and the failure of a couple large financial institutions (e.g. Bear Sterns, Lehman Brothers, etc)

Is his view that there was no housing bubble and that the job losses from construction due to the financial panic in 2008 led to the recession? That new home construction should have continued and the banks should have continued to loan money for mortgages under the same pre-2008 conditions? Maybe I have just been listening to the wrong sources for too long, but if you look at FRED's home price index charts, the rate at which home prices increase jumps prior to the crisis. Admittedly this doesn't necessarily mean there was a bubble, but it does stand out in the plot.

Further, I don't like that he just dismisses that home construction and manufacturing job losses took place in entirely different areas. It doesn't seem to me like you can just hand wave that away. While we definitely overcorrected by not building enough homes in the years post crisis, I would need to see stronger evidence to buy his explanation.

[u/TeaRemarkable5335 → u/deadcactus101]

Each point there is empirically wrong. 1)High prices were highly regional. 90% of price inflation was due to constrained supply in cities that led to a mass wave of outmigration and demand shocks in the cities those “housing refugees” moved to. There was a lending boom. It just wasn’t very important to prices. And the worst cohorts of loans were originated after prices had peaked. 2) Mortgage rates didn’t rise. And defaults were not associated with higher rates or rate resets. 3) first sales and construction collapsed. Then well after that happened prices collapsed. Then the vast majority of defaults happened. 4) The CDO market happened when sales were crashing, well too late to have been associated with a housing bubble, and it really was too small to be important, even when it did crash. 5)The tightening that really caused a crisis was imposed by federal regulators and in every city, even those where prices and construction had been moderate (which was most of them), low tier home prices, and only low tier prices, crashed after the tightening. 6) Housing starts are a leading indicator of recessions and they had been declining for 2 years before those failures happened. And they were down 70% and stayed down because the extreme tightening in lending standards, much tighter than it had been for decades, was being enforced by then.

[u/deadcactus101 → u/TeaRemarkable5335]

Most of those are good points. However, while I'm not an expert, I have read quite a bit on the perspective of financiers during that time and even had the chance to speak to a few. At least as Lehman and Bear Stearns were in hot water, it wasn't regulation that kept lending from occurring. The banks were frightened that those banks defaulting would affect them and wanted to guard their balance sheets. Without government intervention Bear Stearns and AIG would have probably completely collapsed too. If they did collapse sans gov help, the recession would have been even worse.

Again I'm not an expert and I don't have sources in front of me right now, but to blame the whole thing on regulators just goes against everything anyone has told me or I have read.

[u/IgnoreThisName72 → u/deadcactus101]

He also opens with standard neoliberal talking points - like zoning restricting supply, artificially creating scarcity.

[u/deadcactus101 → u/IgnoreThisName72]

I agree with those talking points. I just don't think they are a primary cause of the financial crisis

[u/TeaRemarkable5335 → u/deadcactus101]

Here’s a post where I show how the outflow of households from LA (because of depopulation related to downzoning) was the main reason for the Phoenix housing boom. https://www.mercatus.org/research/policy-briefs/housing-was-undersupplied-during-great-housing-bubble

Here’s a post where I show that the supposed construction boom in Las Vegas didn’t happen at all, even though top economists claim it did (apparently never having bothered to look up a Fred chart before asserting it.) https://kevinerdmann.substack.com/p/joseph-stiglitz-on-housing-in-nevada

[u/MadnessMantraLove]

And Zoning

[u/Mexatt]

He wrote a whole book. It's extremely good. I've never really seen it discussed in many places.

[u/Furita]

Seems a theory not really Backed up by academia. Great recession is being studied by all main universities and unclear how this is linked to this new book

[u/Resourceful_Goat]

Crashed by Adam Tooze is free on Spotify and a better explanation than this.