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2008: What Really Happened - Todd Sheets #6200 · Financial Survival Network

• 0:00
  Speaker 1: As we got caught up in the bursting of the
• 0:02
  Speaker 1: housing bubble and then the financial crisis, and then this
• 0:05
  Speaker 1: extraordinary response that occurred with the bailouts of the investment
• 0:08
  Speaker 1: banks and all the other things that were unprecedented historically,
• 0:13
  Speaker 1: and that caused so much frustration.
• 0:15
  Speaker 2: I realized that.
• 0:16
  Speaker 1: It appeared we were moving into an environment in terms
• 0:20
  Speaker 1: of government involvement in the system, bailouts, the Federal Reserve
• 0:27
  Speaker 1: responses to these different things that was unlike anything that
• 0:30
  Speaker 1: had happened in my lifetime, and I needed to dig in.
• 0:33
  Speaker 3: You were listening to Carrie Letz's Financial Survival Network, where
• 0:37
  Speaker 3: you get valuable information you just can't find anywhere else
• 0:41
  Speaker 3: to thrive in today's trying times. You need the Financial
• 0:44
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• 0:57
  Speaker 2: Ever, And welcome.
• 1:01
  Speaker 4: You are listening to and watching the Financial Survival Network.
• 1:05
  Speaker 2: I'm your host, Carrie Lutz.
• 1:07
  Speaker 4: Well hard to believe two thousand and eight the last
• 1:11
  Speaker 4: global financial crisis, and it's been sixteen years. Maybe it's
• 1:17
  Speaker 4: time for a look back, because certainly one of the
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  Speaker 4: major issues during this campaign season was housing affordability, and
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  Speaker 4: housing affordability has never been more out of reach for
• 1:31
  Speaker 4: more people than it is now. So the book is
• 1:34
  Speaker 4: two thousand and eight. What really Happened? Tod Cheats, the
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  Speaker 4: author is with us now. Todd, you just released this
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  Speaker 4: book a month ago. What was the reason you wrote
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  Speaker 4: the book?
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  Speaker 1: Yeah, well, so the reason that I wrote the book
• 1:49
  Speaker 1: was as we got caught up in the bursting of
• 1:53
  Speaker 1: the housing bubble and then the financial crisis, and then
• 1:56
  Speaker 1: this extraordinary response that occurred with the bailouts of the
• 1:59
  Speaker 1: investment banks and all the other things that were unprecedented historically,
• 2:04
  Speaker 1: and that caused so much frustration.
• 2:06
  Speaker 2: I realized that.
• 2:07
  Speaker 1: You know, it appeared we were moving into an environment
• 2:11
  Speaker 1: in terms of government involvement in the system, bailouts, the
• 2:17
  Speaker 1: Federal Reserve responses to these different things that was unlike
• 2:20
  Speaker 1: anything that had happened in my lifetime, and I needed
• 2:23
  Speaker 1: to dig in and start doing a lot more research
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  Speaker 1: so I understood the history and what really caused this event,
• 2:30
  Speaker 1: and then also understood the historical history behind the event
• 2:34
  Speaker 1: as well. And so you know, that led to a
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  Speaker 1: number of years of researching these things, and then the
• 2:40
  Speaker 1: process of putting the book together.
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  Speaker 4: All right, so what do you think we've learned in
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  Speaker 4: the past sixteen years. I know what you've learned, but
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  Speaker 4: what do you think the rest of us have learned?
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  Speaker 2: Well?
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  Speaker 1: I think unfortunately we kind of ended up as a
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  Speaker 1: whole taking away the wrong messages from what happened. The
• 3:00
  Speaker 1: kind of the dominant narrative that evolved was the idea
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  Speaker 1: that this occurred because of what I call in the
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  Speaker 1: book a gradual trend of deregulation, with the idea being
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  Speaker 1: that this went back to the late Carter years and
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  Speaker 1: then the Reagan administration.
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  Speaker 2: We went down this.
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  Speaker 1: Deregulatory trend across a range of different industries, and that
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  Speaker 1: eventually it spun out of control and it just went
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  Speaker 1: too far, and that allowed markets to spin out of control,
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  Speaker 1: which then created a housing bubble and then a panic.
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  Speaker 2: And as I.
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  Speaker 1: Got into the research on all of this, you know,
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  Speaker 1: what I saw is basically what really happened could not
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  Speaker 1: have been further from that understanding. And you know, the
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  Speaker 1: things that actually caused the housing bubble that led to
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  Speaker 1: the crisis, and then even the panic and the crisis
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  Speaker 1: itself were driven by factors, you know, that were completely
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  Speaker 1: the opposite of this general understanding that occurred, all right.
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  Speaker 4: So nobody really understood what was happening. The deregulation was
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  Speaker 4: definitely a factor. The ability to raise interest rates as
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  Speaker 4: high as you wanted, getting rid of all the yeasery laws,
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  Speaker 4: combined with that, I'm sure was a factor. But it
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  Speaker 4: was a lack of understanding also on the part of
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  Speaker 4: consumers homeowners when they signed on the dotted line, what
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  Speaker 4: the effects of these refinancings and negative interest, negative amortization
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  Speaker 4: mortgages and adjustable mortgages and all this type of stuff,
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  Speaker 4: what that would actually wind up, how it would wind
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  Speaker 4: up affecting you.
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  Speaker 2: No question.
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  Speaker 1: I mean, there was confusion throughout the system, of failure
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  Speaker 1: to understand and anticipate what was happening at the time,
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  Speaker 1: and then, as we've talked about, even in the aftermath,
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  Speaker 1: so you know, at the time. What I show in
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  Speaker 1: the book is what actually caused the housing bubble was
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  Speaker 1: the major exp undertaken by the two government sponsored enterprises,
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  Speaker 1: Fanny May and Freddie Mack, that by the mid nineteen nineties,
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  Speaker 1: for the first time ever, had come to dominate housing
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  Speaker 1: housing finance in a way that was unique in our
• 5:13
  Speaker 1: country's history, we had always had very predictable, reliable housing markets.
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  Speaker 1: It was thought of as like a cornerstone of wealth
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  Speaker 1: for most young families or young people starting.
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  Speaker 2: Out in life.
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  Speaker 1: You know, go out and buy a home, and if
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  Speaker 1: you hold it over time, it will grow in value,
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  Speaker 1: not rapidly, but at a reasonable pace. And that housing
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  Speaker 1: was generally safe from the kinds of booms and busts
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  Speaker 1: that we've seen in other areas of the economy. And
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  Speaker 1: that was basically true. That also is reflected in the
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  Speaker 1: housing data that goes back to the eighteen eighties had
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  Speaker 1: But what changed kind of beneath the radar, was that
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  Speaker 1: beginning in the early nineteen seventies, Fanny May and Freddie Mack,
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  Speaker 1: which became private institutions traded on the New York Stock Exchange,
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  Speaker 1: but ones that were also given special government privileges that
• 6:04
  Speaker 1: allowed Washington to continue to play a role in housing finance.
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  Speaker 2: They started to.
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  Speaker 1: Grow, and by the mid nineties they were getting close
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  Speaker 1: to the point, not quite, but close to the point
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  Speaker 1: where they were responsible for almost one out of every
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  Speaker 1: two dollars of single family mortgage finance in this country.
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  Speaker 1: So when in nineteen ninety eight they undertook a massive
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  Speaker 1: expansion of their businesses, and it was massive and sudden.
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  Speaker 1: The year before they had grown by something like six
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  Speaker 1: or seven percent. In nineteen ninety eight, they grew by
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  Speaker 1: around fifteen percent, and they continued to grow at that
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  Speaker 1: rate for the next four years. All of a sudden,
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  Speaker 1: what we see in the national data is an extraordinary
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  Speaker 1: and unprecedented escalation in housing prices that began to take
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  Speaker 1: place at that point in time, and so that started
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  Speaker 1: luring people into this idea that you know, hey, housing,
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  Speaker 1: you know is not just to get rich slow mechanism.
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  Speaker 1: It's something that people can make some real money on
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  Speaker 1: in the short term as well.
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  Speaker 4: Right, So when you when you look at it also,
• 7:12
  Speaker 4: you know, one of the things that one of the
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  Speaker 4: things you think about with a housing crisis, right is
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  Speaker 4: that you know AIG their failure, and when you go
• 7:26
  Speaker 4: back to AIG, you know, it's so funny. A large
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  Speaker 4: point reason of why AIG failed was because then Attorney General,
• 7:38
  Speaker 4: who later on became the disgraced, the disgraced what would
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  Speaker 4: you say, Governor of New York none other than Andy Cuomo,
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  Speaker 4: actually caused this guy, who is very conservative, he would
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  Speaker 4: have never done all these seed you know, collateral default
• 8:00
  Speaker 4: CDOs and cmos. But because Cromo pushed him out I
• 8:06
  Speaker 4: think his name was Greenberg wound up. The new leadership
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  Speaker 4: of AIG was very reckless and they did all sorts
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  Speaker 4: of things that Hank Greenberg would have never done.
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  Speaker 1: Yes, I mean, look, we saw this kind of throughout
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  Speaker 1: the spectrum, from home buyers who were taking on obligations
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  Speaker 1: that they didn't fully understand and appreciate the risks of
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  Speaker 1: to financial institutions that were providing loans under terms and
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  Speaker 1: buying and accumulating in some cases you know, fairly exotic
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  Speaker 1: mortgage securities that like the ones you referenced, or just
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  Speaker 1: making you know, regular home loans and maintaining a piece
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  Speaker 1: of the securitizations on their books. We saw at AIG,
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  Speaker 1: as you referenced, Merrill Lynch had significant problems in the
• 9:02
  Speaker 1: fourth quarter of two thousand and seven. City Group had
• 9:05
  Speaker 1: similar problems both situations.
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  Speaker 2: Excuse me of two thousand and seven.
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  Speaker 1: In both situations, longtime CEOs were filed fired from those
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  Speaker 1: institutions as well. And as you go back through it,
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  Speaker 1: you know the thing that connected all of these institutions,
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  Speaker 1: as the domino started to fall, all of which started
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  Speaker 1: to happen after the housing bubble began to collapse. But
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  Speaker 1: the thing that linked all these institutions together was exposure
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  Speaker 1: in some form to single family home mortgages, whether it
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  Speaker 1: was securitization pieces they retained on their books or through
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  Speaker 1: the kinds of instruments that you just referenced at AIG
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  Speaker 1: and others. Yeah, yeah, pretty amazing.
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  Speaker 4: So do you think that we can have another crash
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  Speaker 4: like we did before because we don't have liars loans,
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  Speaker 4: you know, we they have done a number of things
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  Speaker 4: to stop it from half opening. There's frank which which
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  Speaker 4: the FED has showed that they won't enforce unless it's
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  Speaker 4: against a small bank, not against a big bank. Right,
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  Speaker 4: all these things.
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  Speaker 1: Yeah, yeah, So, I mean, look, we have learned some lessons.
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  Speaker 1: I think the regulators did learn some lessons in that respect,
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  Speaker 1: and maybe more importantly, the lenders learned some lessons in
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  Speaker 1: this respect. I mean, we now know we can have
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  Speaker 1: a national housing bubble and that prices nationally, you know,
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  Speaker 1: can decline by twenty twenty five percent like they did
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  Speaker 1: after the bubble collapsed. So there is less recklessness on
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  Speaker 1: the lending side of things. But I think because we
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  Speaker 1: didn't draw the proper lessons from the last from the
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  Speaker 1: housing bubble and the financial crisis. You know, we now
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  Speaker 1: have different problems, so we followed all of that up.
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  Speaker 1: I mean, the first phase of the housing bubble was
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  Speaker 1: created by Fanny Maine Freddie Mack, as I talked about
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  Speaker 1: in the book, from ninety eight through two thousand and one,
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  Speaker 1: But from two thousand and two to two thousand and
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  Speaker 1: five the bubble was really driven by easy money, low
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  Speaker 1: interest rate policies of the Federal Reserve. When they lower
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  Speaker 1: interest rates after the tech bubble collapsed in two thousand
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  Speaker 1: to try and protect the economy, they did not realize
• 11:18
  Speaker 1: that they were making the historic mistake of pushing short
• 11:21
  Speaker 1: term interest rates down below the rate of housing appreciation,
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  Speaker 1: which caused an incredible sense of opportunity to make money
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  Speaker 1: quickly by borrowing it on adjustable rate mortgages and buying
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  Speaker 1: a home that was appreciating it let's say five six
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  Speaker 1: seven percent, and for financing it with a loan that
• 11:39
  Speaker 1: was on a variable rate short term basis, maybe had
• 11:42
  Speaker 1: a three to four percent interest rate kind of thing.
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  Speaker 1: So because of all that and failing to learn the
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  Speaker 1: proper lessons we came out of the crisis with the
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  Speaker 1: FED continuing to gauge engage in very easy money, low
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  Speaker 1: interest rate policies through out the period of time after that,
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  Speaker 1: and we've kind of gone through another round of asset inflation,
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  Speaker 1: so housing prices are very high. Again, getting back to
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  Speaker 1: your question, I don't think we're necessarily poised for another
• 12:13
  Speaker 1: collapse because of the change in the lending markets that
• 12:16
  Speaker 1: you alluded to, but we have a massive affordability issue
• 12:19
  Speaker 1: right now and that I think played a big role
• 12:22
  Speaker 1: in this past election, and it's also a part of
• 12:25
  Speaker 1: you know, this bout of inflation that frustrated so many
• 12:28
  Speaker 1: people in the last four years as well. It wasn't
• 12:32
  Speaker 1: just in consumer prices for a period of time, but
• 12:35
  Speaker 1: it also came in housing prices and priced a lot
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  Speaker 1: of people out of the marketplace. So it doesn't have
• 12:42
  Speaker 1: to necessarily have the same end, but we have, you know,
• 12:45
  Speaker 1: a kind of a different.
• 12:45
  Speaker 2: Set of problems that have arisen this time.
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  Speaker 4: So you know, the crash, if there is a crash
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  Speaker 4: in housing, it's not going to be because of fraud
• 12:54
  Speaker 4: and liars loans as they called it. It's going to
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  Speaker 4: be from something more structural and less intentional if you will.
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  Speaker 2: Yeah, I think that's that's likely. I mean, if we
• 13:06
  Speaker 2: and we don't have to have a crash.
• 13:07
  Speaker 1: I mean, the other option is that we go through
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  Speaker 1: what sometimes gets called lost a lost decade or a
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  Speaker 1: lost two decades of return. So people come in and
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  Speaker 1: buy a home at these very high prices that we
• 13:19
  Speaker 1: now have as a result of all of this, but
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  Speaker 1: instead of getting the kind of predictable, you know, three
• 13:25
  Speaker 1: four percent growth in the value of the home over time,
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  Speaker 1: the home values just stagnate for ten or fifteen years.
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  Speaker 1: And so you know that if people are aware of that,
• 13:36
  Speaker 1: then maybe that gets them to look a little bit
• 13:38
  Speaker 1: more closely at our rent versus by decision and think
• 13:43
  Speaker 1: more about whether, well, do I really want to take
• 13:46
  Speaker 1: on home ownership and all of that if I don't
• 13:48
  Speaker 1: think I'm going to make much money out of the
• 13:49
  Speaker 1: home over the next ten to fifteen years.
• 13:51
  Speaker 4: So yes, yes, And that really is the problem is.
• 13:57
  Speaker 4: You know, we've seen home prices escalate so so far,
• 14:01
  Speaker 4: so fast, even faster than the rate of inflation, whatever
• 14:05
  Speaker 4: that actual rate might be, And we don't really know
• 14:08
  Speaker 4: what that rate is. We only know the government numbers,
• 14:11
  Speaker 4: which we know from past experience we should accept with
• 14:16
  Speaker 4: the grain of salt. Right, So even if they don't
• 14:21
  Speaker 4: go up, many people who are buying, who've bought into
• 14:25
  Speaker 4: American dream, buy your home, hold on to it, get
• 14:29
  Speaker 4: another blah blah blah, watch the price go up. They
• 14:32
  Speaker 4: might be in for a disappointment.
• 14:34
  Speaker 1: How yeah, for a disappointment in the case of like
• 14:38
  Speaker 1: we just talked about, a lost decade of appreciation. But
• 14:42
  Speaker 1: also the risk that they should be aware of is
• 14:44
  Speaker 1: you had to be very careful about how much leverage
• 14:46
  Speaker 1: you would buy a home at at these point, at
• 14:48
  Speaker 1: this point in time, or if you're thinking, you know,
• 14:51
  Speaker 1: you already own a home that's appreciated a lot, and
• 14:54
  Speaker 1: maybe you're thinking about taking out an equity loan or
• 14:56
  Speaker 1: a reverse mortgage or something like that, people should be
• 14:59
  Speaker 1: very cautious about the use of debt against these current
• 15:03
  Speaker 1: home values because there is a risk, like we've talked
• 15:06
  Speaker 1: about in one scenario, of failure to appreciate, but there's
• 15:11
  Speaker 1: also a risk of another downturn in housing prices, which
• 15:14
  Speaker 1: you know obviously is going to hurt the people with
• 15:16
  Speaker 1: the most leverage most quickly. So all these things to
• 15:20
  Speaker 1: be aware of. All right, Well, we really appreciate you
• 15:23
  Speaker 1: coming on the show. Todd sounding the alarm here because
• 15:27
  Speaker 1: I think better safe than sorry.
• 15:30
  Speaker 2: Forewarned is Forearmed.
• 15:31
  Speaker 4: The name of the book two thousand and eight What
• 15:34
  Speaker 4: Really Happened, written by Todd Sheets, who's on with us now,
• 15:38
  Speaker 4: and you can find it on Amazon. There's a link
• 15:41
  Speaker 4: to the Amazon purchase page in the show notes to
• 15:45
  Speaker 4: this interview on Financial Survival Network dot com. We ask
• 15:49
  Speaker 4: while you're there, you please sign up for our newsletter,
• 15:52
  Speaker 4: like over sixty thousand FSN members have already done so Todd,
• 15:58
  Speaker 4: we'll be looking at what happens and if there's any
• 16:02
  Speaker 4: major signs reverberations in the market, we'll be sure to
• 16:06
  Speaker 4: have you back on. Good luck with the book and
• 16:08
  Speaker 4: we'll talk to you soon.
• 16:09
  Speaker 2: That sounds so great, Thanks so much for having.
• 16:11
  Speaker 3: Me, Thanks for listening to Carrie Letz's Financial Survival Network,
• 16:15
  Speaker 3: your solution to today's trying times. For the latest, go
• 16:19
  Speaker 3: to Financial Survivalnetwork dot com. Financial Survival Network now more
• 16:25
  Speaker 3: than ever