In this 3 minute video, I summarize the causes of the Great Recession.
In a nutshell, it boils down five steps:
- Banks adopting super risky mortgage lending practices (while being egged on by the George W. Bush’s government to make homeownership possible for even low income Americans who wouldn’t be able to normally afford to buy a house)
- Wall Street stacking on top of that $50 worth of side bets for every $1 of risky mortgage loans (through a complex web of derivatives that nobody had much experience with, even though ratings firms like Moody’s and S&P and Fitch promised everyone the side bets were AAA rated and safe)
- All of this happening amidst a climate of laissez faire deregulation in which regulators were essentially asleep at the wheel (Bush’s top regulators said they wanted to be “kinder, gentler" to the companies they were supposed to be policing, and posed with a chainsaw as if to literally cut regulations)
4. When enough people defaulted on their risky mortgages, the entire system collapsed, dragging down economies worldwide (due to the interconnected global system and tons of leverage on the part of financial institutions, this inevitable wave of defaults was the straw that broke the camel’s back)
5. With less money to lend, banks were forced into a credit crunch and some European governments pursued policies of austerity, which may have prolonged the recovery (here in the USA meanwhile, the stimulus may have been too small which prolonged the crisis)
Add all that up and it leads to a prolonged recession — the deepest since the Great Depression in the 1930s. The effects of the recession are still rippling across the globe. It’s especially concerning today that we may be on the verge of making many of the same mistakes again.
So, what lessons can we take from this crisis? Here are a few simple ones:
- We can’t totally deregulate Wall Street and let it do whatever it wants (Earth to President Trump! You’re on the verge of repeating many of Bush’s mistakes that helped lay fertile ground for the last crisis)
2. Lending standards need to be adequate (recent reports indicate that subprime loans may be back with a new name: “non-prime loans”)
3. Wall Street needs to be way more careful with new investment types (some savvy investors like Warren Buffet famously derided credit default swaps as “financial weapons of mass destruction” years before the crisis but many of his colleagues didn’t exercise much care)
The Great Recession wasn’t unavoidable. But another one will be if we don’t learn these lessons, and probably several more too.
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I’m posting a video essay each month this year. You can watch my earlier video essays: Shouldn’t we ban this type of commercial? | Why I changed my mind about illegal immigration | How to Make $1 Million (If You’re Young) | 5 Marketing Phrases That Should Make You Instantly Skeptical