Since I haven't actually fucking got around to that video I was going to do, I figure I might as well just not leave all the assembled information to rot on my hard drive. So, I may as well post it here in the meantime. I've made posts on the Recession before, but this is probably the most definitive account I've managed to assemble to date.
The standard narrative of the Great Recession is that there was a housing bubble which led to a severe financial crisis which led to a severe recession through bank disintermediation. Financial disintermediation is essentially a credit crunch, when banks refuse to lend to one another and investment grinds to a halt.
This narrative is, I believe, incorrect. First and foremost is the housing bubble. It seems to me that the housing bubble was nothing more than a coincidence; a blip on the economy's radar that just confuses people. Looking at the number of
housing starts per million people we can see a clear moderation in the previously cyclical nature of housing construction. Now, this would be interesting, if housing starts weren't commensurate with population growth at the time, largely due to immigration.
So it's not entirely clear that there was any *significant* mal-investment in housing in the first place; investors didn't dump their money into housing as part of a speculative frenzy. While there was a national rise in house prices over the period, looking at the states there's a significant
difference in just how prices acted, which would suggest a supply-side issue as well as a general trend. Usually, people blame the Federal Reserve for the housing bubble, claiming Greenspan kept interest rates "too low for too long". However, the idea that the rise in house prices was engendered by the Fed doesn't hold up under scrutiny, as housing construction is driven primarily by long-term interest rates, which have been
decoupled from the Federal Funds rate since the 1990s, most likely due to a glut in savings from countries like China, India and Saudi Arabia.
Not that the Federal Reserve should even need absolving from the creation of the bubble. Since the bubble seems to have been largely irrelevant. House prices
peaked in 2006, and began a steady decline through 2007. Unemployment however, didn't rise significantly until mid-2008, when a **tight monetary regime** tanked the economy. And the Financial Crisis (I'm using the failure of Lehman Bros as the original metric) properly began just months after this decline.
By the time we actually began to see any real, recessionary consequences, housing construction had declined to match the
nadir of the 1990s recession. So, the decline of house prices obviously had no appreciable, negative impact on the economy.
Some of you are probably wondering where I got **tight money** from. Nominal aggregate income, which is one of the most reliable indicators of the stance of monetary policy--alongside inflation--
declined mid-2008. We don't just need to rely on nominal income, either. The real interest rate on 5-year TBs appreciated sharply in
July 2008 and Alan Greenspan himself presciently predicted a Recession by December 2007, cited stabilising profit margins which are *partly* influenced by monetary policy. And a
month-by-monthlook at GDP illuminates the fact that the Financial Crisis only began months into the Recession. And, from the mouth of an actual economist, Richmond Fed insider
Robert Hetzel has explicitly blamed the Recession on a tight-money failure.
Now, it's important to note that we would have had a financial crisis *anyway*, without a recession to trigger it. It just probably wouldn't have been so severe. Highly-rated mortgage debt was incredibly toxic, and Jeffrey Friedman has a good
paper on how asset requirements actually incentivised banks to hold this kind of debt. Of course, high demand from Europe and Fannie Mae/Freddie Mac further encouraged the holding of such debt (the latter two for political reasons).
It's not dissimilar from the Great Depression, which Milton Friedman identified as being a function of tight money much like 2008. It has been demonstrated throughout history that financial crises seldom lead to Recessions. The 1987 stock market crash (bigger, even, than 1929) led to virtually no stress on banks and didn't even register on the economy's radar. The crash of 1929, also, didn't even occur until after other indicators like industrial production were indicating weakness. Not only this, but the crash of 1929 didn't even cause a *financial crisis* unlike most people seem to think. The 40pc declination in the number of banks following the crash were due to small banks failing (as many had done in the '20s) and mergers, meaning no disintermediation and no credit crunch. The actual financial crisis was in 1933, when 11pc of all deposits were effected--1933 also happens to be the first year of recovery in the US.
How does this relate to 2008?
Credit was at an all-time high by the end of the year, and the data seems to indicate that the financial system was fully repaired by 2009 at the latest, despite chronic anaemic growth. The key here is that depressed lending is a **real**, not **nominal** factor, which would lead to slower rGDP growth. The weakness in nominal GDP suggests an issue with tight-money. The problem wasn't loose money, too much debt or over-speculation by the banking system.
The problem was Ben Bernanke hitting the brakes in 2006-07 in response to a rise in oil prices.
**TL;DR**
- There was no mal-investment in housing, the bubble is largely irrelevant.
- An unknowingly tight policy was followed by the Federal Reserve, which led to the Recession and triggered the financial crisis.
- The financial crisis would've happened anyway, as the government incentivised the holding of risky-mortgage debt and had poor capital requirements.
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