Speaker 1: As we got caught up in the bursting of the
housing bubble and then the financial crisis, and then this
extraordinary response that occurred with the bailouts of the investment
banks and all the other things that were unprecedented historically,
and that caused so much frustration.
Speaker 2: I realized that.
Speaker 1: It appeared we were moving into an environment in terms
of government involvement in the system, bailouts, the Federal Reserve
responses to these different things that was unlike anything that
had happened in my lifetime, and I needed to dig in.
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Speaker 2: Ever, And welcome.
Speaker 4: You are listening to and watching the Financial Survival Network.
Speaker 2: I'm your host, Carrie Lutz.
Speaker 4: Well hard to believe two thousand and eight the last
global financial crisis, and it's been sixteen years. Maybe it's
time for a look back, because certainly one of the
major issues during this campaign season was housing affordability, and
housing affordability has never been more out of reach for
more people than it is now. So the book is
two thousand and eight. What really Happened? Tod Cheats, the
author is with us now. Todd, you just released this
book a month ago. What was the reason you wrote
the book?
Speaker 1: Yeah, well, so the reason that I wrote the book
was as we got caught up in the bursting of
the housing bubble and then the financial crisis, and then
this extraordinary response that occurred with the bailouts of the
investment banks and all the other things that were unprecedented historically,
and that caused so much frustration.
Speaker 2: I realized that.
Speaker 1: You know, it appeared we were moving into an environment
in terms of government involvement in the system, bailouts, the
Federal Reserve responses to these different things that was unlike
anything that had happened in my lifetime, and I needed
to dig in and start doing a lot more research
so I understood the history and what really caused this event,
and then also understood the historical history behind the event
as well. And so you know, that led to a
number of years of researching these things, and then the
process of putting the book together.
Speaker 4: All right, so what do you think we've learned in
the past sixteen years. I know what you've learned, but
what do you think the rest of us have learned?
Speaker 2: Well?
Speaker 1: I think unfortunately we kind of ended up as a
whole taking away the wrong messages from what happened. The
kind of the dominant narrative that evolved was the idea
that this occurred because of what I call in the
book a gradual trend of deregulation, with the idea being
that this went back to the late Carter years and
then the Reagan administration.
Speaker 2: We went down this.
Speaker 1: Deregulatory trend across a range of different industries, and that
eventually it spun out of control and it just went
too far, and that allowed markets to spin out of control,
which then created a housing bubble and then a panic.
Speaker 2: And as I.
Speaker 1: Got into the research on all of this, you know,
what I saw is basically what really happened could not
have been further from that understanding. And you know, the
things that actually caused the housing bubble that led to
the crisis, and then even the panic and the crisis
itself were driven by factors, you know, that were completely
the opposite of this general understanding that occurred, all right.
Speaker 4: So nobody really understood what was happening. The deregulation was
definitely a factor. The ability to raise interest rates as
high as you wanted, getting rid of all the yeasery laws,
combined with that, I'm sure was a factor. But it
was a lack of understanding also on the part of
consumers homeowners when they signed on the dotted line, what
the effects of these refinancings and negative interest, negative amortization
mortgages and adjustable mortgages and all this type of stuff,
what that would actually wind up, how it would wind
up affecting you.
Speaker 2: No question.
Speaker 1: I mean, there was confusion throughout the system, of failure
to understand and anticipate what was happening at the time,
and then, as we've talked about, even in the aftermath,
so you know, at the time. What I show in
the book is what actually caused the housing bubble was
the major exp undertaken by the two government sponsored enterprises,
Fanny May and Freddie Mack, that by the mid nineteen nineties,
for the first time ever, had come to dominate housing
housing finance in a way that was unique in our
country's history, we had always had very predictable, reliable housing markets.
It was thought of as like a cornerstone of wealth
for most young families or young people starting.
Speaker 2: Out in life.
Speaker 1: You know, go out and buy a home, and if
you hold it over time, it will grow in value,
not rapidly, but at a reasonable pace. And that housing
was generally safe from the kinds of booms and busts
that we've seen in other areas of the economy. And
that was basically true. That also is reflected in the
housing data that goes back to the eighteen eighties had
But what changed kind of beneath the radar, was that
beginning in the early nineteen seventies, Fanny May and Freddie Mack,
which became private institutions traded on the New York Stock Exchange,
but ones that were also given special government privileges that
allowed Washington to continue to play a role in housing finance.
Speaker 2: They started to.
Speaker 1: Grow, and by the mid nineties they were getting close
to the point, not quite, but close to the point
where they were responsible for almost one out of every
two dollars of single family mortgage finance in this country.
So when in nineteen ninety eight they undertook a massive
expansion of their businesses, and it was massive and sudden.
The year before they had grown by something like six
or seven percent. In nineteen ninety eight, they grew by
around fifteen percent, and they continued to grow at that
rate for the next four years. All of a sudden,
what we see in the national data is an extraordinary
and unprecedented escalation in housing prices that began to take
place at that point in time, and so that started
luring people into this idea that you know, hey, housing,
you know is not just to get rich slow mechanism.
It's something that people can make some real money on
in the short term as well.
Speaker 4: Right, So when you when you look at it also,
you know, one of the things that one of the
things you think about with a housing crisis, right is
that you know AIG their failure, and when you go
back to AIG, you know, it's so funny. A large
point reason of why AIG failed was because then Attorney General,
who later on became the disgraced, the disgraced what would
you say, Governor of New York none other than Andy Cuomo,
actually caused this guy, who is very conservative, he would
have never done all these seed you know, collateral default
CDOs and cmos. But because Cromo pushed him out I
think his name was Greenberg wound up. The new leadership
of AIG was very reckless and they did all sorts
of things that Hank Greenberg would have never done.
Speaker 1: Yes, I mean, look, we saw this kind of throughout
the spectrum, from home buyers who were taking on obligations
that they didn't fully understand and appreciate the risks of
to financial institutions that were providing loans under terms and
buying and accumulating in some cases you know, fairly exotic
mortgage securities that like the ones you referenced, or just
making you know, regular home loans and maintaining a piece
of the securitizations on their books. We saw at AIG,
as you referenced, Merrill Lynch had significant problems in the
fourth quarter of two thousand and seven. City Group had
similar problems both situations.
Speaker 2: Excuse me of two thousand and seven.
Speaker 1: In both situations, longtime CEOs were filed fired from those
institutions as well. And as you go back through it,
you know the thing that connected all of these institutions,
as the domino started to fall, all of which started
to happen after the housing bubble began to collapse. But
the thing that linked all these institutions together was exposure
in some form to single family home mortgages, whether it
was securitization pieces they retained on their books or through
the kinds of instruments that you just referenced at AIG
and others. Yeah, yeah, pretty amazing.
Speaker 4: So do you think that we can have another crash
like we did before because we don't have liars loans,
you know, we they have done a number of things
to stop it from half opening. There's frank which which
the FED has showed that they won't enforce unless it's
against a small bank, not against a big bank. Right,
all these things.
Speaker 1: Yeah, yeah, So, I mean, look, we have learned some lessons.
I think the regulators did learn some lessons in that respect,
and maybe more importantly, the lenders learned some lessons in
this respect. I mean, we now know we can have
a national housing bubble and that prices nationally, you know,
can decline by twenty twenty five percent like they did
after the bubble collapsed. So there is less recklessness on
the lending side of things. But I think because we
didn't draw the proper lessons from the last from the
housing bubble and the financial crisis. You know, we now
have different problems, so we followed all of that up.
I mean, the first phase of the housing bubble was
created by Fanny Maine Freddie Mack, as I talked about
in the book, from ninety eight through two thousand and one,
But from two thousand and two to two thousand and
five the bubble was really driven by easy money, low
interest rate policies of the Federal Reserve. When they lower
interest rates after the tech bubble collapsed in two thousand
to try and protect the economy, they did not realize
that they were making the historic mistake of pushing short
term interest rates down below the rate of housing appreciation,
which caused an incredible sense of opportunity to make money
quickly by borrowing it on adjustable rate mortgages and buying
a home that was appreciating it let's say five six
seven percent, and for financing it with a loan that
was on a variable rate short term basis, maybe had
a three to four percent interest rate kind of thing.
So because of all that and failing to learn the
proper lessons we came out of the crisis with the
FED continuing to gauge engage in very easy money, low
interest rate policies through out the period of time after that,
and we've kind of gone through another round of asset inflation,
so housing prices are very high. Again, getting back to
your question, I don't think we're necessarily poised for another
collapse because of the change in the lending markets that
you alluded to, but we have a massive affordability issue
right now and that I think played a big role
in this past election, and it's also a part of
you know, this bout of inflation that frustrated so many
people in the last four years as well. It wasn't
just in consumer prices for a period of time, but
it also came in housing prices and priced a lot
of people out of the marketplace. So it doesn't have
to necessarily have the same end, but we have, you know,
a kind of a different.
Speaker 2: Set of problems that have arisen this time.
Speaker 4: So you know, the crash, if there is a crash
in housing, it's not going to be because of fraud
and liars loans as they called it. It's going to
be from something more structural and less intentional if you will.
Speaker 2: Yeah, I think that's that's likely. I mean, if we
and we don't have to have a crash.
Speaker 1: I mean, the other option is that we go through
what sometimes gets called lost a lost decade or a
lost two decades of return. So people come in and
buy a home at these very high prices that we
now have as a result of all of this, but
instead of getting the kind of predictable, you know, three
four percent growth in the value of the home over time,
the home values just stagnate for ten or fifteen years.
And so you know that if people are aware of that,
then maybe that gets them to look a little bit
more closely at our rent versus by decision and think
more about whether, well, do I really want to take
on home ownership and all of that if I don't
think I'm going to make much money out of the
home over the next ten to fifteen years.
Speaker 4: So yes, yes, And that really is the problem is.
You know, we've seen home prices escalate so so far,
so fast, even faster than the rate of inflation, whatever
that actual rate might be, And we don't really know
what that rate is. We only know the government numbers,
which we know from past experience we should accept with
the grain of salt. Right, So even if they don't
go up, many people who are buying, who've bought into
American dream, buy your home, hold on to it, get
another blah blah blah, watch the price go up. They
might be in for a disappointment.
Speaker 1: How yeah, for a disappointment in the case of like
we just talked about, a lost decade of appreciation. But
also the risk that they should be aware of is
you had to be very careful about how much leverage
you would buy a home at at these point, at
this point in time, or if you're thinking, you know,
you already own a home that's appreciated a lot, and
maybe you're thinking about taking out an equity loan or
a reverse mortgage or something like that, people should be
very cautious about the use of debt against these current
home values because there is a risk, like we've talked
about in one scenario, of failure to appreciate, but there's
also a risk of another downturn in housing prices, which
you know obviously is going to hurt the people with
the most leverage most quickly. So all these things to
be aware of. All right, Well, we really appreciate you
coming on the show. Todd sounding the alarm here because
I think better safe than sorry.
Speaker 2: Forewarned is Forearmed.
Speaker 4: The name of the book two thousand and eight What
Really Happened, written by Todd Sheets, who's on with us now,
and you can find it on Amazon. There's a link
to the Amazon purchase page in the show notes to
this interview on Financial Survival Network dot com. We ask
while you're there, you please sign up for our newsletter,
like over sixty thousand FSN members have already done so Todd,
we'll be looking at what happens and if there's any
major signs reverberations in the market, we'll be sure to
have you back on. Good luck with the book and
we'll talk to you soon.
Speaker 2: That sounds so great, Thanks so much for having.
Speaker 3: Me, Thanks for listening to Carrie Letz's Financial Survival Network,
your solution to today's trying times. For the latest, go
to Financial Survivalnetwork dot com. Financial Survival Network now more
than ever