2008 Crash Revisited: Shadow Banks, Repo Runs and a $70 Trillion Pool

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This episode challenges the popular account that the 2008 crash was caused by government policy pushing banks to lend to low-income buyers. The global pool of fixed income savings doubled from about $35 trillion in 2000 to $70 trillion in 2008, much of it from China, India and Middle Eastern oil states, while the Federal Reserve held the federal funds rate at 1 percent for over a year after the dot-com bust and 9/11. Hungry for yield, that money flowed into mortgage-backed securities whose top tranches were rated AAA. By 2007 the shadow banking system of investment banks, hedge funds and money market funds held about $62 trillion in assets against $39 trillion in traditional banks, funding itself each night through repurchase agreements backed by those securities.

In 1998 Commodity Futures Trading Commission chair Brooksley Born pushed to regulate over-the-counter derivatives and was opposed by Alan Greenspan, Robert Rubin and Arthur Levitt, after which Congress passed a law preventing her agency from regulating those markets. The Financial Crisis Inquiry Commission concluded the Community Reinvestment Act was not a factor, and research cited here shows the biggest growth in mortgage debt came from borrowers in the middle and top of the credit score range, including speculators buying second, third and fourth homes. When Lehman Brothers failed in September 2008, the repo market froze. The episode then explains the balance sheet recession that followed, contrasts US quantitative easing with European austerity, and traces political effects including Brexit.

• Only about 12 economists publicly predicted the housing collapse from the data between 2000 and 2006.
• US household debt rose from 77 percent of disposable personal income in 1990 to 127 percent at the end of 2007.
• The official recession lasted 19 months, from December 2007 to June 2009, and Robert Kuttner called the era the Lesser Depression.
• Median household wealth fell 35 percent between 2005 and 2011, from over $106,000 to about $68,000.
• China, India, Indonesia and Oceania largely escaped the worst of the downturn.