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The 2008 lie
2008 wasn't a subprime crisis. It was something worse.
Fink Money
October 18, 2024 • Estimated Reading Time: 5 minutes
We’ll diverge a little from underreported short term events and move to something I think it key to understanding about the last 20 years of policy.
You might even get a bit enraged about this.
See, the reasons for 2008 occurring have been spoken about in seriously ‘wrong’ ways.
It has been labelled the sub prime crisis for years, under the perception that it was people with really low credit ratings that had been the cause of it once the economy turned and went down the toilet…
But is this what actually happened?
I was chatting with Tim about this before writing, and he used to sell luxury villas in Spain…
This was his take…
2008 was not a subprime crisis — it was a crisis of people earning well who wanted more.
For so long we have been fed the view that subprime borrowers were the cause of the GFC, when in fact it was middle class borrowers and high FICO (credit score) borrowers who really caused it.
And this makes sense, right?
Those more capable of taking out more credit will be the ones causing issues with liquidity when their debts can’t be repaid, versus sub-prime borrowers, whose mortgages are already priced accordingly and therefore risks to default know, being the cause.
Here’s what MIT professor Manuel Adelino says about this…
The subprime crisis argument is that the supply of credit to low-income households fuelled increasing house prices, and was the source of the crash. We studied data on all mortgages originated in the United States between 2002 and 2006. We could see the size of the mortgage and the income reported by the buyers. We also had ZIP code-level data from the IRS, and we had access to a sample of mortgages for which we could see whether they were still current on their payments or had defaulted.
We found there was no explosion of credit offered to lower-income borrowers. In fact, home ownership rates among the poorest 20 percent of Americans fell during the boom because those buyers were being priced out of the market. Instead, we found credit was expanded across the board. Everybody was playing the same game. But credit expanded most drastically in areas where house prices were rising the most, and these were markets that were beyond the reach of lower-income borrowers.
The overwhelming majority of mortgages were going to middle income and relatively high income households during the boom, just as they have always done.
Even in the Big Short, there were depictions where the poorer family seemed to have the big house in Florida…
That’s factually illiterate and largely a poor display by the movie to fuel the idea that lower income borrowers were the cause of collapse.
The example of the stripper was certainly more relevant — a relatively high risk borrower with multiple properties.
It’s very interesting because 2008 was almost a special case, historically…
But what caused the financial crisis was that middle- and high-income borrowers – including speculators who bought up homes to sell for profit – began defaulting at unprecedented rates. We had a crisis because non-subprime borrowers defaulted, where previously they very rarely had.
In 2003, 71 percent of delinquent mortgages were held by subprime borrowers. But by 2006, subprime borrowers were holding only 39 percent of delinquent mortgages. Not only that, there just aren’t enough low-income borrowers to bring down the financial system, it’s too robust for that.
But why does this matter?
Well it’s because for years after, mortgages weren’t extended to lower income households, even though they weren’t at fault for defaults.
Policy and regulation was changed with the view that lower income subprime borrowers were the problem when in fact it was not them.
If you make policy and change regulations on a false premise, that’s not a good look and is very likely to constrain economic growth — which, it did, whilst adding zero stability to the banking system post 2008 (other things did, like the massive liquidity injections from global central banks!).
Are there parallels with today?
Perhaps there might be with buy to let mortgages?
Landlords who are overleveraged maybe?
The Bank of England did a report on this last year, looking at the state of the BTL market in the UK and it seems all good — but it seemed all good pre 2008 as well.
Key quote…
Around 9% of the BTL stock of loans is securitised, compared with around 5% for owner-occupiers.
The biggest risk to the BTL sector is a combination of unemployment, regulatory changes and fiscal constraints from the Treasury…
And could this be the precursor to Fred Harrison’s 18 year property cycle theory?
He’s predicted the last two, why not make it 3/3…
