The real truth about the 2008 financial crisis | Brian S. Wesbury | TEDxCountyLineRoad
Brian Wesbury is Chief Economist at First Trust Advisors L.P., a financial services firm based in Wheaton, Illinois.
Mr. Wesbury has been a member of the Academic Advisory Council of the Federal Reserve Bank of Chicago since 1999. In 2012, he was named a Fellow of the George W. Bush Presidential Center in Dallas, TX where he works closely with its 4%-Growth Project. His writing appears in various magazines, newspapers and blogs, and he appears regularly on Fox, Bloomberg, CNBCand BNN Canada TV. In 1995 and 1996, he served as Chief Economist for the Joint Economic Committee of the U.S. Congress. The Wall Street Journal ranked Mr. Wesbury the nation’s #1 U.S. economic forecaster in 2001, and USA Today ranked him as one of the nation’s top 10
forecasters in 2004. Mr. Wesbury began his career in 1982 at the Harris Bank in Chicago. Former positions include Vice President and Economist for the Chicago Corporation and Senior Vice President and Chief Economist for Griffin, Kubik, Stephens, & Thompson. Mr. Wesbury received an M.B.A. from Northwestern University’s
Kellogg Graduate School of Management, and a B.A. in Economics from the University of Montana. McGraw-Hill published his first book, The New Era of Wealth, in October 1999. His most recent book, It’s Not As Bad As You Think, was published in November 2009 by John Wiley & Sons. In 2011, Mr. Wesbury received the University of Montana’s Distinguished Alumni Award. This award honors outstanding alumni who have “brought honor to the University, the state or the nation.” There have been 267 recipients of this award out of a potential pool of 91,000 graduates.
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All Comments (21)
Whatever type of investment you decide to get into, I think the key message here or for me rather is to start investing no matter how small. When you invest, you're buying a day that you don't have to work.. I pray everyone reading this become successful
He presents as if he is speaking to a group of high school dropouts. Wesbury is pulling a fast one here. He presents the stock market as a proxy for the health of the business community. The stock markets are a reflection of INVESTOR CONFIDENCE. Investor confidence often lags business health coming out of a significant downturn. His story about mark-to-market is accurate but drops short of the reality of all of the terrible loans that lax regulations allowed to be funded and were about to be defaulted on and the enormous number of derivatives that had been pushed throughout the world's financial systems using those loans as the revenue source.
From my experience in buying a house in 2007, the problem was banks and lenders were offering balloon mortgages, adjustable rate mortgages, and very low credit score acceptance. I wasn't done with my 4-year degree and my wife just graduated college. Our lender asked us how much we wanted to borrow, we said how much do we qualify for. This went back and forth before the lender said we could borrow $800K before any approvals were completed. Both my wife and I were in Business, so we knew this was ridiculous for our 1st home and we only borrowed $250K, which was a lot for us still. Imagine if we didn't know better and took $800K right before the recession? That is what many people did and I don't see how you can't blame the banks and lenders on that. Unless you are saying the American people are to blame for not having tighter restrictions on them?
No matter what the interest rates are, if you don't tell the lenders that you can't perform that type of lending, then they will go just short of predatory lending. It is the same principle as payday loans... they are terrible ideas, but the private sector will offer them until we say it is predatory lending towards the poor. So who do you blame for payday loans? Prime interest rates have not been higher than 1.5% during and since this video. The key difference is there are certain loans, debt/equity ratios, and additional documentation required for getting a home loan. The banks didn't force this on themselves, the government had to. The "real" reason is because capitalism incentivizes greed and exploitation. Without regulations, no good company in a capitalistic society wouldn't go for as much profit as possible. Even if that gets people foreclosed on and sends our economy into a recession, at least the bankers and investors got their bonuses.
Also, mark-to-market is not applicable for this dude's hurricane story. You don't pay anything from mark-to-market accounting. It accurately shows what your assets are worth if you sold them, making financial statements accurate for investors, which is the whole basis of accounting. What investors do when they see your company is accurately worth, is speculation, not accounting. Not using mark-to-market accounting helped cause the Enron, WorldCom and many other scandals throughout time. As you can see, just accurately showing the worth of your company in your financial statements is not something capitalist companies want to do. If you have $1 billion in stocks in 2018, but it drops to $200 million in 2019... how can you reasonably tell your family and investors you still have $1 billion in stocks? yeah, that's what companies used to do.
I was a loan officer for sub prime auto loans in that time. I remember asking dealer finance guys for proof of income for a loan applicant who had marginal credit. The dealer said nevermind...he'd just send the loan to our competitors who weren't requiring proof of income for any applicants. That was happening in the mortgage business 50x as frequently. Absolutely insane
The problem with blaming low interest rates as a major contributor to loan defaults is that the argument can easily be tested by comparing the US default rates to those of other Countries (eg Canada, UK, Australia) all of whom were operating under comparable interest rates at the time. Australia and Canada had essentially zero spike in defaults in the period leading up to the crisis in 2008 despite low interest rates.
As a Bank CFO who lived this problem in 2008 and on (and it was real and terrible), this gentleman is irresponsible to suggest market to market accounting rules are the problem. This is a VERY COMMON point of contention between investment bankers that are traders and must mark their trading portfolios to market and the accounting profession. Accounting is the problem, not the fact that the market has collapsed and an asset is worthless. If if you want to know why the market collapsed then research congressman Barney’s Frank’s committee and the rules they changed regarding obtaining a mortgage loan. His committee so liberalized the rules that anyone could get a mortgage loan, they were called no income verification loans. If you could fog a mirror mortgage banking companies would make you a loan. Add to that the almost no capital requirements of mortgage companies and the fact that mortgage loan officers are compensated 100% on commission for loans made you can see that there were no safeguards in the system to ensure loans were made to borrowers that could pay them back. Before this time mortgage loans were the most secure loans made because they were rigorously underwritten and verification of income was required on all loans, Barney Frank’s committee stopped all that. Then add the contribution of the investment bankers who created mortgage-backed securities backed by these no verification mortgage loans and spun them into derivative securities so the true nature of the collateral backing the security was very difficult to determine. Oh, and investment bankers are paid on commission too.
I knew the end was near when I went into a bank in 2005 in anticipation of a purchase. We pre-qualified for an amount that was 3x more than I could ever conceivably be able to pay. I looked at my wife, then the loan officer and told him he is out of his mind to qualify us for that amount. He just looked at me dumbfounded and didn't understand why we wouldn't borrow that much.
I think if you want to get close to "what really happened" it's best to have a discussion of an expert panel, instead of just one person sharing his opinion.
Simply because it's statistically unlikely that one single person makes no mistake in his/her analysis. Some errors may not be obvious to him/her, but to other people who focused on other sources.
This is a good video and I like his contribution, but I am not convinced.
Brian, thanks for the video and I would love to see a follow up on this and hear your thoughts on the recent FASB change that appears to reinstate this mark-to-market rule, where fair-value of securities net profit/loss flow through to earnings. I only heard about this since Buffett's last annual letter (2017) condemning the new rules. It seems to me, this is a rule that seems like a great idea right at the top (and puts a bow on top of record earnings when things are good), but like you say, it can make the ride down a real cliff-hanger (see margin accounts...).
"It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble." - brian s. westbury, 2008
In 2003-2004, I was working on a data warehouse for a major bank wtith the initials "WF". I worked for their Home Equity division. As part of my getting to understand their business and their situation, I listened in on a couple of dozen phone calls between CSRs and customers with a Home Equity Line of Credit (HELOC). Here was a typical scenario:
- The customer bought a house for $250K
- The market rose and the house was now valued at $300K
- The customer took out a HELOC for $50K
- The market rose and the house was now valued at $350K
- The customer had only $5K left on their HELOC and called to request an increase of $50K (to $100K)
- The bank approved the request
I never heard a CSR deny a request. When I would ask the CSR about this, I was repeatedly told that by the CSR that they were "under orders" not to deny a request unless the customer's situation was "really bad".
During the 2000s, I interviewed at several mortgager brokers/lenders. I was told over and over again that the main part of the job was to find a lender, get the customer a mortgage, pocket the commission, and move on.
My point, again, is that this major bank (and by extension all the big banks) and the mortgage lending companies KNEW that were doing something wrong and unsustainable, but were doing it anyway.
Brilliant! But of course you can only explore so many things in a 20 minutes presentation. What is missing here is the unintended effect affordable housing laws had. Through AIG, Freddie Mac, and Fannie Mae the government, in an effort to make houses available to everyone, started reducing the requirements they made to guarantee loans. When I bought my first house 35 years ago the bank had a list of requirements you had to meet to qualify for the loan: you had to be gainfully employed by no less than two years, your mortgage payments could not exceed thirty some percent of your income, both to be proven by submitting a copy of your tax filings for the two most recent years, you could not be under bankruptcy protection or have filed for a number of years, etc. You also had to put down 10-15% of the amount you wanted to borrow in the form of a down payment. This all guaranteed that people could no buy houses they could not afford.
Add to that the most devastating financial tool ever invented: the ARM (Adjustable Rate Mortgage), with now loose requirements that included, in many cases, just a nominal down payment (sometimes as low as 3%). The only situation an ARM made sense was if you intended to buy a property, sit on it for a couple of years to realize a whopping annual appreciation of 14-15% as it happened during 2004-2005, and then turn around and sell to realized a very nice profit, before interest rates on your ARM started to climb, up and you couldn't afford the monthly payments.
The only thing required to get a loan being having a pulse, and people getting ARMs with ridiculously low interest rates and down payment caused a very large number of people to buy houses they couldn't afford and should have never bought in the first place. As the A (adjustable) part of the ARM started causing the interest rates to go up many people found themselves unable to make the mortgage, and mortgage defaults began, and as the rates of the ARMs hit a critical mass of mortgages defaults cascaded. People started walking away from properties and banks started foreclosure procedures, and as the supply side of the market grew dramatically Real Estate prices collapsed.
I agree with the presenter, the people who claim to have save us are precisely the ones who pushed us over the cliff: The Federal Reserve and the Federal Government.
In 2008 I was in my mid twenties and focused on finding a career opportunity. A skilled craft seemed like a good idea for a long while. My parents at the time both got laid off from they're professions. I worked as hard as I could to try and keep the home for us. The adjustable rate mortgage payments had gone from $1300 to over $4000 a month. Then the job industry I was recruited for had more mass lay offs. Even though there were so many campaign promises at the time for jobs. So many started living in cars, and trucks. To some, Getting to work wherever it was, was more important then if you had the comfort of a home. Almost a year later when work picked up a little. I met travelers that insisted living in a tent was the best way to afford living. My grandparents who survived the great depression said many family's lived out of cars when they had to. It's an economical hardship. Just don't give up trying to find a way.
I think he missed a key factor. Frank a few years before pushed through a federal program to encourage home loans to people regardless of ability to pay. That's what loaded up the sub prime market for problems.
I've watched this same video from time to time by some years. As I develop my own ideas on Economics, it started to make more and more sense to me. Mr. Wesburry uses an approach easy to understand the economic cycles when he associates them to the concept of mark-to-market accounting, which is pretty intuitive even for the, say, non-initiated. However, something he said makes me wonder: if mark-to-market was banished between 1938 and 2007, how could Enron use it to deceive its investors as it did in 2000?
In his story about the house in front of the hurricane, what he fails to mention is that 20 years earlier the place was worth a LOT less, but with the loose lending rules and rampant speculation to catch the high returns the value went up to $500k.
Assets that are never written down can't be considered true assets which creates its own set of problems
While I find this perspective interesting, and I hate more government control, I am not convinced that free market capitalism can work without a little bit of control from a higher power.
In 2007-2008 I was laid off I could not find a job for the first time in my life even though I was employed steadily as a mechanical engineer since graduating in 1980 Finally in 2008 I finally got a job....selling vacuums at Sears for $11 hour.....part time. Long story short, 3 years after being laid off I lost my house to foreclosure and was technically homeless until I could secure an apartment. The bank physically put my belonging on the street and kicked me out of my house with a foreclosure that was eventually ruled as illegal. At Sears I was working with architects, mortgage brokers, and computer programmers. Now forward 10 years and since 2020 I have been working at Amazon as a repair contractor now at $32.50 hr. and the company I am working for can not find enough people to work and request I work overtime every week. Lesson learned....certainly don’t trust the government to care for working class except to take taxes every year.
Barney Frank's committee might have changed the mark-to-market accounting rule that helped ameliorate the financial crisis, but Barney Frank was instrumental in causing the financial crisis. He was the congressman who arrogantly said he was perfectly comfortable "rolling the dice" - i.e. maintaining relaxed lending standards and capital requirements in the early 2000s so high risk borrowers could purchase homes. Then, after the crisis hit, he did a 180 and began castigating banks for the "predatory lending" that he encouraged all along (and Fannie and Freddie implicitly mandated). He was never held to account for this (as politicians rarely are) and is now comfortably retired. Ironically, the man who was always talking about "fairness" helped create a plethora of financial injustice for the millions of innocent victims who lost their shirts in the 2008 financial crisis. Life certainly ain't fair.
It is worth observing that a reduction in the rate of interest on a mortgage loan will not necessarily lead to the ability to purchase a larger, more amenity rich residential property. The reason for this is simple. The initial increase in borrowing capacity will be capitalized into higher land prices and, therefore, higher prices for all residential properties.
We saw this in the Hoover administration as well and at that time everyone was looking at the "Own You Own Home" program, a government program similar to what Clinton pushed for, deregulating lending for mortgages. It wasn't the actually cause as Wesbury explains, but it compounds when integrated into an existing accounting practice. He should have explained that QE isn't simply increasing the supply of money as many think that's where inflation starts, it's scaling the balance sheet to increase assets as well as liabilities, so yes it increases the "supply" of money, but it does it through debt. And it gets worse, the root cause of inflation is inefficiency on the supply side to meet demand. This inefficiency is bad enough on its own, but when its financed through debt it brings along an interest rate. Since ultimately this debt is our national debt there is most certainly an interest rate on that, otherwise nobody would consider buying it. This is why the federal reserve really doesn't want raise the interest rate, it would consume even more of our deficit each year. Congress has indeed raised the ceiling on spending, but they know they're running out of time.
The only way to reverse this is to lower taxes, rely on the velocity of money to scale tax revenue up which it always has, use that to pay down the national debt as quickly as possible so that eventually someday we can raise interest rates again and everyone can grow wealth in saving not just investing. Given how long it will take to do this, and that a term for a president is only 4 years, 8 at most but not reliably we can safely assume this will never happen. We were doomed as a nation in the 1970's and didn't even know it. It would take an incredible effort on the part of our leaders to set aside their political ambitions and unite on an economic understanding we once had to solve this. I don't think it's possible. But creating money, i.e. growing the economy purely off debt that exposes every single citizen to such a liability is the antithesis of how this nation was intended to function, the idea was to minimize the effect of government decisions on the people. Should we be surprised that centralizing decision making does this? That is what the Federal Reserve is.