What Was the 2008 Financial Crisis?

JodyBuchanan

Well-Known Member
I had a friend ask me this very question a few days ago. I guess he wasn't paying attention when it happened. Either that, or he had no interest and anything that occurred didn't affect him. I personally wasn't very affected by anything that was going on at the time, so whatever the financial crisis was about wasn't top of mind. Over the years though, I've read lots about it. What I've uncovered is startling. What's even more startling is that what kicked off the financial crisis in the first place hasn't even been resolved, so what will come next will be an utter nightmare. I won't get into that here. I won't even get into the nuts about bolts of what went on during the years that led up to 2008. What I will get into will be the general story of the mini-depression we went through as a nation and a world at the time. Bird's eye view stuff.

If you look back to the era between 2001 and 2008, you'll be looking back to a very weird time. I remember standing in the parking lot of the company I worked for while talking on the phone with a mortgage lender. That was sometime in 2005. I had signed up for an online mortgage and when the (very eager) salesman called me to sell me on it, he suggested that I get a "split mortgage" so I wouldn't have to pay any PMI, otherwise known as mortgage insurance. When we got around to how much I earned per year and how I'd be paying this mortgage off, he eluded to the fact that he didn't give a damn. It was so easy to buy a house back then. The banks were throwing mortgages at people. People who barely needed them or wanted them. At the time, I knew something strange was going on. No responsible business loans money the way the banks were loaning it. Ultimately, I felt there was something odd about the guy I was speaking with and decided to go with a local lender. I guess that was better. I got the mortgage and purchased my first house.

Three years later, I sold that house for a loss and bought my next house. That was at the pinnacle of the financial crisis. I paid too much and when I sold it five years later, I lost money again. The housing market still hasn't recovered in some parts of the country. The only thing inflating house prices now in some locations is the pandemic and riots. Apparently, not many people want to live in cities with that type of thing.

I sometimes wonder if the guy I spoke to about that first mortgage still has that job. I bet he doesn't. I bet the shady company he worked for doesn't even exist anymore. Why? Because it was a junk company selling a junk product. The companies that fared well back then were the ones that made sense. The ones that sold real products that people actually wanted and needed. They were built upon a solid foundation, as Dave Ramsyy says in his book titled, The Total Money Makeover. I'm reading the first chapter in this book and it's covering what the financial crisis of 2008 was and how it went down. I'm giving it to you in my own words with some entertaining conjecture thrown in.

Basically, it was the worst buying from the worst. It was the worst type of borrower who borrowed from the worst type of lender. The people who had no business at all taking out a mortgage found banks and lenders who would lend far too much money to them to buy something they completely couldn't afford. And then the buyer bought two of them. I remember speaking to my friend's father about this very issue. He told me that his son was getting a mortgage, but was having trouble making the financials work. He said that he "couldn't afford the house, but what was he supposed to do?" I responded that he rent. The man stood there and looked at me like I had two heads. I think I introduced a new concept to him. People who can't afford houses are called renters. I know, how novel of an idea.

The loans these bankers gave to those who couldn't afford them were called sub-prime mortgages. If you were alive during the time, that phrase has been drilled into your head. Everyone knew how crappy these loans were, but no one seemed to care. The best part of an otherwise lousy economy was the real estate market. Companies did everything in their power to keep the big mirage going. Banks would package up these sub-prime mortgages and sell them in the market as bonds. The bonds eventually turned into something I'm sure you're very familiar with: derivatives. A derivative is derived from something else. Or multiple something elses. Stocks, bonds, mortgages, annuities, insurance policies, all sorts of things. Since the real economy wasn't doing very well and since the big banks wanted to keep the gravy train rolling, they bought and sold derivatives like it was nobody's business. By June 2008, the notional value of OTC (over the counter) derivatives was more than $683 trillion, after more than doubling in the preceding two years. Things were out of control. Eventually, a spark lit the fuse that set off a chain reaction. The entire house of cards came tumbling down. First went Lehman Brothers and then many, many more banks and financial institutions. I remember watching people carrying their work supplies out of the building in which they used to work. They put everything in boxes and did the walk of shame out onto the sidewalk. We never saw those people again.

I also remember hearing a lot about, if interest rates rise just a little bit, the folks who hold those variable rate mortgages are going to default! It was as if no one had ever heard of such a thing. If those loans defaulted, banks would go out of business. And if those banks weren't on the inside track with the Fed and the government and in line to get a bailout, they'd go under, only to remain a very small piece of an insignificant history of the world. Do you want to see what happens when tons of banks go out of business or get bought out by bigger banks? Bank consolidation. Check this out. It sort of makes you wonder if there was some sort of conspiracy going on.

bank-consolidation.jpg

Thank you, Visual Capitalist.

If there's one thing banks don't like, it's competition.

What was the spark that lit the fuse? Yep, you guessed it. Interest rates began to rise and people couldn't afford the mortgages they really couldn't afford in the first place. I can remember all the news about the tragedies of families losing their homes. It was like, "really?" These were families who moved into 7,000 square feet McMansions that overlooked the California coast. It was crazy, but the crisis had begun. Borrowers couldn't pay their loans, so they defaulted. Fights broke out between lenders and local municipalities. The municipalities wanted people to continue paying for their property and school taxes and banks wanted people to continue paying their mortgages. It was nasty. Ultimately, people paid for nothing and squatted in the homes they no longer owned. The entire thing was a dark stain on humanity. It took forever to get those people out of those houses. I wonder if any of them are still in them. Probably.

With all the defaults, home prices began to plummet. And with the sheer volume of mortgages failing and house prices dropping, the normal everyday American got caught in the crossfire. Even my house value dropped. The mortgage balance didn't, but the price did. That's why I sold at a loss. A loss of $40,000 to be exact. With the fear that was creeping into the real estate market so pronounced, fear began creeping into the regular stock market as well. The phrases under water and short sale became every day vocabulary. Bankruptcy and foreclosure were even more popular.

The chain reaction had begun. Housing prices were falling. Foreclosures were everywhere. The stock market took a nose dive. People stopped spending, which caused businesses to fail, which caused people to lose their jobs, which caused them not to spend, which hurt businesses. You get the idea. It was a cycle the spiraled out of control. By the time the government hit up the Fed for some cash, things were pretty bad. Unemployment was terrible. By the time the Fed injected money into the economy, I think we were at rock bottom. Eventually, the inflation of capital took hold and things became somewhat bright again. Although, as I alluded to in the beginning of this post, the underlying issues weren't resolved in the least. And from what I've seen, banks are beginning to loan strange money out again. My advice to the average Joe out there is to make frugality a normal part of life.

What are your opinions on the financial crisis of 2008? Did your 401k lose value? How did you react? Did you lose your home? Your job? Did you take a loss when selling a house? I'd love to hear about your experiences, good or bad.
 
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