
The Real Cost of the 2008 Financial Crisis - okket
https://www.newyorker.com/magazine/2018/09/17/the-real-cost-of-the-2008-financial-crisis
======
ptero
Just a personal observation / data point as a lot of folks everywhere are
saying "put bankers in prison" any time they recall 2008 crisis. This is from
the US, no idea how things played out in other countries:

Government shares a significant portion of the blame for this crisis. It
required raising affordability of homes (i.e., loans) for lower income
families. They might as well legislate away entropy, friction or gravity.
Banks cannot lower home selling prices, so instead they had to become
"creative" with loans, for example lend at 0% for the first 5 years. And lend
more than today's purchase price (creating strong demand for inflated
assessments) so some of that extra cash can be used to pay mortgage for a few
years. Five years later the music stops unless you can refinance again and
kick that can down the road.

This insane game of musical chairs, where banks generate toxic loans,
securitize them and throw them at someone else, had to end in tears. Everyone
understood this. But faced with the regulation to raise affordability, what
exactly should the lenders have done? They _HAD_ to use at least X% of new
loans to low income families.

Sadly, this is yet another case of good intentions (helping lower income
families) implemented as a clumsy regulation that ends up hurting people you
wanted to help. My 2c.

~~~
pitaj
Don't forget another thing the government did: previous bailouts. When large
banks were told they were "too big to fail", they heard "your risks will be
subsidized by taxpayers", so of course they took on more risk. We should have
let the banks fail, if they really were going to.

Another thing: monetary policy causing business cycles, or making them much
worse. The recent money-printing by the fed is super scary to me, because it
created a new bubble in the stock market.

~~~
394549
> Don't forget another thing the government did: previous bailouts. When large
> banks were told they were "too big to fail", they heard "your risks will be
> subsidized by taxpayers", so of course they took on more risk. We should
> have let the banks fail, if they really were going to.

Why couldn't the stockholders get wiped out when a TBTF bank gets bailed out?

To me, that seems like a fair compromise that protects the economy but still
punished excessive risk taking.

~~~
pitaj
You don't need to bail out banks to protect the economy.

~~~
docker_up
Yes, you do. If they are by definition too big to fail, then them shutting
down could cause runs on banks. When people's confidence in banks crashes,
then very bad things happen to our financial system which is predicated on the
idea of people keeping their money in banks and bank accounts.

Even people pulling their money out of money market mutual funds almost caused
a collapse of the monetary system, which is why the Fed had to secure those.

~~~
jhayward
Instead of bailing out the banks, they could easily have simply been put in
receivership, with Treasury as the recevier in control. Simply re-capitalize
them from the federal reserve, and they don't have to miss a single hour's
worth of operation.

Unwinding the mess of CDOs, etc. would have been long and tiresome but, with a
little help from a convenient executive order or two perfectly do-able.

------
Lavery
In a lot of ways, the current expression of the tech sector (certainly from a
valuation standpoint) and the startup scene particularly feels like a
consequence of the response to the financial crisis. Critics of the Fed spent
years loudly worrying about how the various QE programs were going to drive up
inflation. Of course, this didn't materialize, at least as measured in the
usual basket of goods and services. What did happen was a broad and sustained
inflation in financial assets / collapse in yields that drove everyone further
out along the risk curve, with VC being the furthest point out.

The tie in to inflation is darkly amusing the because the classic precursor to
inflation is wage growth. Broadly, there hasn't been any--except in the tech
sector, which has seen a veritable explosion in pay from where it was a decade
ago.

~~~
fzzzy
I'd just like to point out that the tech pay explosion likely has a lot to do
with this: [https://en.wikipedia.org/wiki/High-
Tech_Employee_Antitrust_L...](https://en.wikipedia.org/wiki/High-
Tech_Employee_Antitrust_Litigation)

~~~
Lavery
No question that played a role, but it's not like the settlement happened in
2011 and then salaries immediately corrected to the current levels and stayed.
This has been a steady climb upwards.

------
victor106
Ray Dalio just published an excellent free book on this. You can download it
here

[https://www.principles.com/A-Template-For-Understanding-
Big-...](https://www.principles.com/A-Template-For-Understanding-Big-Debt-
Crises-By-Ray-Dalio.pdf)

------
nafey
But what was the alternative to the bailouts? Another depression? I feel we
made it across fairly well.

~~~
andrepd
The bailouts are controversial, but it's the bailouts AND the complete absence
of criminal responsibility that's inexcusable.

It is well known and documented that the financial crisis was no accident;
everybody who headed the financial services industry to the state it was in
did so _knowingly_ , knowing full well the inevitable consequences, but not
giving a damn because the arrangement let them to become handsomely wealthy,
beyond our imagination. They masked everything with a mixture of stacking the
regulators with their ilk, stacking the _universities_ with their ilk
(economics as a field has zero credibility to me since I discovered how many
theses "greenlighting" CDOs were written in clear conflict of interest),
stacking the government with their ilk.

Then while we (working class) were dealing with the fallout, tithing part of
our work to reimburse their losses, not ONE of those criminals (with the blood
of millions across the globe on their hands, make no mistake) was prosecuted
or in any way made to answer for their actions. Much to the contrary, they
went on enjoying the same mind-boggling luxurious elite lifestyle they always
did.

It's feudalism with extra steps.

~~~
rottyguy
I hope this doesn't come across as me trying to justify what happened but can
anyone be explicitly about what laws were broken and who should have gone to
jail? I know there was a bunch of outrage but want to cut through all that and
get at exactly the issue.

~~~
wonder_er
There was a time when fractional reserve banking [0] was considered simple
fraud (it wasn't called "fractional reserve banking" at the time, it was
"bankers using for personal gain assets that were owned by another and stored
for safe keeping at their bank.")

So, as banking gets complex, the laws get complex. Once we decide fraudulent
(fractional reserve) banking is legal, most of the rest can be whitewashed
with enough handwaving.

[0] [https://en.wikipedia.org/wiki/Fractional-
reserve_banking](https://en.wikipedia.org/wiki/Fractional-reserve_banking) [1]
[https://www.mises.ca/the-economic-benefits-of-ending-the-
fra...](https://www.mises.ca/the-economic-benefits-of-ending-the-fraud-of-
fractional-reserve-banking/)

I know the assertion that fractional reserve banking == fraud is extremely
contentions, and most disagree with me. Feel free to explain why you disagree!

~~~
slg
By that logic anyone who gave out a loan should be thrown in jail. After all
there was a time when charging interest of any kind was considered usury and
was illegal. Once we decided that usury banking is legal, most of the rest can
be whitewashed with enough handwaving.

~~~
Brockenstein
Well that's an argument between the letter of the law and the spirit of the
law it sounds like.

------
dba7dba

      The aftermath produced a lost decade for European economies
      and helped lead to the rise of anti-establishment political
      movements here and abroad.
    

I was visiting family in Hawaii during the 1st Christmas after the financial
crisis started. Guess what? The beach chairs around the pools at the Waikiki
area hotels were _packed_ with guests. Every single one of them. Note I went
because family is there, and stayed with them.

Granted, some guests were probably there because they already had reservations
made before the shtf moment came. Or maybe some there were just vacationing at
Waikiki as they downgraded their vacation plan to more moderate level, instead
of going to Maldives or something.

But the point is the rich were far less impacted by the crisis. And when the
crisis slowly faded away, the rich swooped in and accumulated more wealth.
Like all the foreclosed homes in US being bought up by rich folks to be
flipped, or worse, bought to be rented out.

The rich were barely impacted by the crisis, and the crisis just turned into
an opportunity for the rich to accumulate more wealth more easily.

------
nicktelford
While a generally fascinating piece that connects together the events in the
American and European financial and political systems, it shouldn't be
understated how much of an effect the refugee crisis is having on European
politics, which can be attributed largely to the "Arab Spring"; itself largely
a consequence of the 2008 financial crisis.

~~~
netsharc
I can't help but believe that if the common folk of Europe of the last, say 10
years, was doing economically better, they would have been more generous with
people fleeing warzones looking for help...

~~~
Gys
Doing economically well makes people more generous ? Do you know research to
backup your believe ? Its not what I experience around me. The more we have,
the more afraid we can loose it again, it seems to me.

~~~
paulddraper
Study of High Net Worth Philanthropy is published every few years.
[https://www.ustrust.com/publish/content/application/pdf/GWMO...](https://www.ustrust.com/publish/content/application/pdf/GWMOL/USTp_ARMCGDN7_oct_2017.pdf)

That's focuses only on the wealthy ($200k income or $1m assets), but within
that group, higher incomes consistently donate a greater percentage to
charity.

~~~
Gys
The research in this article (2010) tells a different story:
[https://www.nytimes.com/2010/08/22/magazine/22FOB-
wwln-t.htm...](https://www.nytimes.com/2010/08/22/magazine/22FOB-wwln-t.html)

~~~
paulddraper
The original research (not NYTimes journalism) is actually from 2001 [1]

1\. Of the income groups studied, the highest percentage of income donated was
from the <$25k group, with 4.2% ($587/yr), about one percent more than the
3.1% ($1,620/yr) average.

But the study's highest income division was only $100k. Had they included more
ranges, they would find that giving goes much higher, e.g. $200k-500k donates
8.3% and $2m+ donates 14.0%. [2]

2\. Also in the original study (though absent from the NYTimes article nine
years later), is the finding that more people donated at the higher income
levels. 77% donated in the lowest income group, but 97% donated in the
highest.

And I would give that fact considerable weight for supporting the assertion
"if the common folk of Europe were doing economically better, they would have
been more generous".

[1]
[http://www.cpanda.org/pdfs/gv/GV01Report.pdf](http://www.cpanda.org/pdfs/gv/GV01Report.pdf)

[2]
[https://www.philanthropyroundtable.org/almanac/statistics/wh...](https://www.philanthropyroundtable.org/almanac/statistics/who-
gives)

------
augustus2010
I just wonder why China doesn't have a economic crisis like the EU or the US.
Is their system more superior than us?

~~~
moate
Based on different economics. Even the more socialist leaning EU nations
aren't dealing with straight up Communism.

China's big problem right now is actually that they brought so many people out
of poverty that they're focused on controlling inflation.

Also, they have a state controlled media that reports only what the state
wants. Helps smooth over the rough edges with praise of their great and
successful system.

~~~
chillacy
China’s system is probably better characterized as “State Capitalism” than
communism, since the workers don’t own the means of production.

~~~
moate
We could just go with "Russian Communism" as well and call it a day. Your
point is valid, it's not proper Communism as Marx envisioned.

~~~
chillacy
For sure, Russian Communism after capitalist reforms of the 80s. There's
definitely still a lot of top-down planning in China, but there also aren't
people lining up for allocated food.

------
sidstling
I don't think I agree with the article. Not from a European perspective. I'm
Danish and we've had anti-establishment parties all my life on both the left
and right side of the political spectrum. The populist rightwingers most
similar to Trump and the teaparty saw their dawn in 1998 where they got
elected with 7.4% of the votes. In 2001, three months after 9/11, they recived
12%. In 2005 it was 13.3%. In 2007, before the financial crisis they got
13.9%. In 2011 they got 12.3% and then in 2015 they got their current 21.1%.

If you look at the data, our right wing populist party saw a small decline
following the financial crisis. They saw two major increases, one following
9/11 and one at the height of the European migration crisis but at this point
our economy had fully recovered.

I think it's some what like this around much of Europe. Back in 2001 we got
critiqued by the European Council because we elected a racist party to
government, but Austria recieved much sterner critique at the same time. In
Eastern Europe the local economies have seen huge increases along with right-
wing populism. Greece, who took the worst of the financial crisis, turned to
the intellectual left, not populism.

I think the article is probably on point about America. The tea-party saw it's
dawn in the years following the financial crisis. You had the occupy movement
and now you have the alt-right. We didn't really see similar movements in
Europe though. I guess we do today, and I think we're unfortunately receiving
a lot of bad influence from America. I mean, I can go on the Danish subreddit
right now and see people complain about the MSM. Which makes no sense, because
our media-landscape is completely different from the American. On facebook we
have anti-vaxxer and flathearter groups, mostly using sources like infowars or
breitbart because we simply don't have nonsense-media equivalents in my
country. At least not yet.

So I guess, in a way the article isn't wrong, but all the nonsense is
happening in an economy that's mostly better than before 2007.

~~~
freddie_mercury
Tooze makes the case that Fidesz's victory in Hungary in 2010 was a direct
result of the terms of the IMF bailout. That the supremacy of the Law &
Justice party in Poland was a result of the crisis. That the fall of
Tymoshenko and Yushchenko -- tarred with the pains of the crisi -- in Ukraine
led to rehabilitation of Yanukovych and the subsequent Russian invasion of
Crimea.

In Greece the populists didn't take power in the same ways but it is
disingenuous to pretend they didn't exist and exert power as a result of the
crisis. To call New Democracy -- the party that took power after the crisis --
"not populist" is a mis-reading of history, I think. They campaigned on fear
of illegal immigrants, after all. And the second biggest party is SYRIZA --
which is definitely populist -- and which didn't even exist until the crisis
destroyed PASOK. And by 2015 SYRIZA's clearly populist platform was enough to
take it power in Greece.

One of the themes of Tooze's book isn't that the consequences were immediate.
Sure, it took 6-7 years for SYRIZA to get to power in Greece. But that is
_still_ a direct consequence of the crisis.

~~~
sidstling
Is Fidesz really a comparison point though, for anti-establishment parties?
They held power in 1998 and they saw their biggest increase in votes in from
1998 to 2002.

I mean, you definitely have a point, with them going from from 42.03% in 2006
to 52.73% in 2010, but they weren't born out of the crisis like their American
counterparts, and while they started out anti-establishment, they kind of
became the establishment in 2002.

I'm not saying the financial crisis didn't have an impact on Europe, it
absolutely did, I just think it's much more nuanced and complicated than the
article outlines. On one hand you have countries like Italy, that fit the bill
perfectly, on the other hand you have the Scandinavian countries like my own,
where we didn't really see a rise of populism because it was already here, in
fact we kind of saw a decline. For a while anyway, because right-wing populism
is certainly on the rise now, but is that really the delayed effect of the
financial crisis or is it something much more complicated?

~~~
freddie_mercury
Tooze never made they claim that all of the consequences didn't exist at all
before the crisis. For instance, one of the consequences was the
rehabilitation of Yanukovych in Ukraine. Obviously he existed, with quite a
lot of power, before. But the crisis destroyed the credibility of his rivals
leaving him as "last man standing". And that -- along with the clear
abandonment of Ukraine by the EU (or at least the ECB) during the crisis --
led almost directly to the current invasion of Crimea.

> I just think it's much more nuanced and complicated than the article
> outlines.

Maybe this is where the article is giving you a skewed perception because
Tooze's whole point in his book is that things are super nuanced and
complicated! I mean, part of his thesis is that the invasion of Iraq played an
(eventual, partial) role in Putin humbling the oligarchs in 2009 and further
cementing his power. The whole vibe I got from reading _Crashed_ was that
nothing was simple. It wasn't "subprime mortgages", it wasn't "bad bankers",
for instance. Because those are simple answers, simple explanations.

Tooze's main thesis is that the traditional, simple view is that the 2008
subprime crash was an American thing, the 2010 European crisis was a European
thing, both of them are basically wrapped up by now, and that's that. And that
traditional, simple view is wrong because the real world (unsurprisingly) is
nuanced and complicated.

~~~
sidstling
I guess the outtake is that it's better to read the book than the article
about the book. :)

------
tomcam
It seems like, relatively speaking, Iceland sailed through this by acting like
capitalists: they let the loans fail, consumers took a haircut, and bankers
were sent to jail. Is this a worthwhile comparison or were there fundamental
differences that I (very likely) don't understand?

~~~
aero142
I love the idea, but this really doesn't dispute the central point. Iceland is
an economy with a $24B GDP that is smaller than Vermont's, the lowest US
state. The claim is that letting large US banks fail is a systemic risk that
causes cascading failure. Using Iceland as an example doesn't dispute that
point.

~~~
tomcam
But the citizens of Iceland did in fact lose a ton of money. I think maybe it
does dispute the point? (Arguing more from ignorance here.)

------
RickJWagner
As long as there have been economies there have been periodic upheavals. I
don't think that can be changed.

What can be changed is how the next meltdown/booming economy will affect our
own personal finances. It's a life skill, one that should be given more
attention in school.

~~~
freddie_mercury
Australia has gone 27 years without a recession.

There's a big difference between "sure, we'll never _totally_ get rid of them"
and "do you want them every 5 years or every 50 years?" or "do you want 25%
unemployment or 10% unemployment?"

It is overly fatalistic to pretend they can't be changed in any way whatsoever
and there's no difference between different periodicities and scale of
upheavals.

------
ThomPete
The best explanation I have heard of the financial crisis was in the book "The
End of Alchemy: Money, Banking and the Future of the Global Economy" by the
former head of Bank of England.

It makes the convincing case that there is no real single place to point
fingers and that the crash was the logical consequence of people all doing the
"right thing"

I can highly recommend it as it also takes a historical view of money and what
it is and how it's been used historically. A very interesting book.

So yeah there is a real cost of 2008 but there is also real opportunities.
These things can't be measured until decades later.

However, the anti establishment movement didn't rise because of the financial
crisis it rose because of globalization and the alliance between politicians
and large international organizations to take away opportunities from its own
citizens and start giving it to countries like China after the fall of Soviet
Union. Mixed with that and the liberal social welfare system in Europe and PC
culture which claimed any critical voice was facist, racist etc. That's why
the antiestablishment came about not because of 2008 and wallstreet.

~~~
lotsofpulp
I can point to all the underwriters that approved loans with no income
verification, fraudulent paperwork, officially stating they did checks for a
physically impossible number of mortgages.

~~~
cirgue
A global financial system should absolutely not be able to be taken down by
fraudulent behavior like writing shitty loans. You can point all the fingers
you want at them, but ultimately that's like saying that the intern who was
able to push changes directly to production is the reason your site now shows
nothing but cat pictures: they had a hand in it, but the fact that it happened
points to much larger and more pernicious structural problems that, while
everyone else might have been doing their job correctly, indicate that the
system obviously didn't do the thing you need it to do.

~~~
Retric
Should and did are different things. Banks where approving loans because they
where offloading the risks from bad loans by reselling the mortgage while
pocketing fees.

That's a systematic change that obviously created huge conflicts of interest
and thus had a huge negative impact on the financial sector. Really, it's not
about bad actors it's about bad incentives creating bad actors and worse those
incentives have not really gone away.

------
8bitsrule
IMO the article falls far short of telling 'The Real Cost' for the people of
the US. It's pretty damned superficial, and far from packed with observations
(let alone empirical ones). A look at Cassidy's CV tells me why.

------
WorkUntilRetire
Did Lehman run index funds? What happened to their customers?

What would happen today if a firm like Schwab or Fidelity suddenly went
bankrupt? Would their S&P 500 index funds (Such as SWPPX or FFFFX) drop to
zero, wiping out customer’s retirement?

~~~
craftyguy
> Would their S&P 500 index funds (Such as SWPPX or FFFFX) drop to zero,
> wiping out customer’s retirement?

I'm no expert, but I wouldn't think so if those funds track the indexes, since
the index 'values' are the collective values of the stocks they represent. On
the other hand, SWPPX, etc would no longer be maintained. That's a really good
question though, I hope someone with more knowledge comments!

------
bitxbit
I experienced the financial crisis first hand on Wall Street, a place fraught
with people who pretended to know the ins and outs of risks. It was also a
brutally honest place when it came to winners and losers. But that changed
when Hank Paulson, then the Secretary of Treasury, knelt down on camera and
begged Nancy Pelosi for what was effectively a blank check. Wall Street could
not face reality when it was its turn to be the loser. I believe the real cost
of 2008 is moral hazard. They destroyed the fundamental values of capitalism
and I can't help but feel that we are all still pretending.

~~~
pas
Finiteness (scarcity) of resources is the essence of capitalism, and thus the
effective counterparty risk is also finite. The banking sector converged on
this state via the bad incentives of under-regulation.

The problem is that the counterparty was (and still is) the whole host
economy, the country, the world, etc. And similarly the economy would have
stopped without the bailout.

There is no bigger fish when it comes to global finance, geopolitical
institutions are largely reactionary (eg. the Basel III accords are nice, but
they are completely post-crisis, as there was simply no incentive to push for
better/stronger capital requirements before the crisis). And each country's
financial regulation/oversight agency is bound by the incentives of our greedy
human optimization strategies. (That is politics with all of its problems:
money in politics as in regulatory capture, lack of campaign finance reforms,
etc.)

~~~
bitxbit
Very well put.

------
vinceguidry
The takeaway I got from reading the article to the end does not match the
impression given by the headline, though the headline isn't exactly wrong, per
se. The conclusion given is that the mechanisms put in place to avoid another
recession work just fine but that the political will to use them has been
dried up by the political retrenchment of the right.

That said, if you're at all curious, you should read the article, if not the
book it's summarizing, because it's really really good. One thing that had
escaped me was the fact that America's bailout of its own banks and QE were
both drops in the bucket compared to the massive amount of liquidity the Fed
injected into the global financial system, all of which was paid back just
like the bailouts.

On a personal level, this allays my fears of another recession. The
Anglosphere will wake up one day as if it was dreaming, and the political
upwelling that put Trump into office will fade back down into insignificance.
Another recession at this stage will only accelerate that process, provide
some juicy real estate opportunities to those positioned well enough to take
advantage, and we'll be back to normal within a few years to a decade. I
strongly suspect that Trump won't stand in the way of another global
firefighting operation conducted by the Fed should it become necessary, he's
way too cynical to not do something that works.

We should avoid 'othering' the alt-right if we can. These are Americans like
you and me, as scared and uncertain as all of us, momentarily in the spotlight
and proud of it, but ultimately decent human beings just like the rest of us.

~~~
wuschel
Just had to look up what you mean by 'alt-right':

Quoting Wikipedia:

"The alt-right, or alternative right, is a loosely-connected and somewhat ill-
defined grouping of white supremacists/white nationalists, neo-Nazis, neo-
fascists, neo-Confederates, Holocaust deniers, and other far-right fringe hate
groups."

This does not sound like the average citizen to me, but rather the extreme
part of the spectrum of values.

I'd rather be with Popper's position on a valiant, liberal society, and will
not accept people who stand against human dignity, protection of minorities,
and the lessons from history. There are no excuses for doing this.

~~~
vinceguidry
Neo-nazis and such are the fringe of the movement. They were also around long-
before the term 'alt-right' existed.

Alt-right is the political upswelling that attended Trump's massive rallies,
gathered and orchestrated around the likes of Alex Jones. My personal
definition is "anyone who felt like they got left out of the modern world."

Perhaps my definition isn't in line with how people really want to use it, and
if that's the case, that's unfortunate. Restricting a broad term like alt-
right to just the likes of neo-nazis gives them way more legitimacy than they
deserve and overstates their numbers.

