Home » What Caused the '08 Financial Crisis: Free Markets or Government? financial crisis 2008

What Caused the '08 Financial Crisis: Free Markets or Government? financial crisis 2008

by Dragonspear

Was the 2008 financial crisis caused by market distortions or market failure? Former CEO of BB&T Bank John Allison debates Moody’s economist Mark Zandi.

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That was the topic of a public debated hosted by the Soho Forum in New York City on February 20, 2019. It featured John Allison, former CEO of BB&T Bank and former CEO and president of the Cato Institute, and Mark Zandi, the chief economist of Moody’s Analytics. Allison argued that market distortions led to the financial crisis, and Zandi attributed the crisis to market failure. Soho Forum Director Gene Epstein moderated.

It was an Oxford-style debate, in which the audience votes on the resolution at the beginning and end of the event, and the side that gains the most ground is victorious. Allison prevailed by convincing about 10 percent of audience members to change their minds.

Today Allison is an executive in residence at the Wake Forest School of Business. He’s author of The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope (McGraw-Hill, 2012). Zandi is the author of Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis.

The Soho Forum, which is sponsored by the Reason Foundation, is a monthly debate series at the SubCulture Theater in Manhattan’s East Village.

Produced by Todd Krainin.

Music: “Modum” by Kai Engle is licensed under a CC-BY creative commons license. .

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Edward Dodson 13/09/2021 - 4:02 Chiều

There is a good deal to be learned by studying how depression triggers aligned in the past. So, to understand why the "Great Depression" occurred in the 1930s, one must look at what occurred during the years building up to the crash.

A significant amount of the credit made available during the 1920s went into land speculation. A good primer on what occurred is found in the book "Only Yesterday" by historian Frederick Lewis Allen. Not only did investors become captured by the frenzy of the Florida land boom, this same frenzy occurred in many cities in response to population increases that triggered a significant increase in the demand for both commercial and residential land. An agricultural land boom also occurred during the First World War, during which time farmers borrowed heavily to expand their land holdings and production. A few years was required after the war ended for European farmers to recover, but by the mid-1920s global production exceeded demand, prices fell, farmers defaulted on loans when government guarantees were removed, and rural banks failed by the hundreds.

As the land boom crashed, investors shifted heavily into the stock market, driving up prices well beyond what any fundamentals supported. Thus, by the end of 1929 the U.S. economy was stressed across almost all areas of production as well in the financial markets. To be sure, imprudent bank lending deepened the crash and lengthened its duration, but it was a crash in the making because of the failure to utilize tax policy to tame the credit-fueled, speculation-driven land markets. A few economists (e.g., Harry Gunnison Brown, Scott Nearing and John R. Commons) had argued the case made in the late 19th century by Henry George, who showed that cyclical booms and busts would be tamed only if the full or nearly-full public capture of the potential annual rental value of land and of rents from other sources (e.g., the broadcast spectrum) became public policy.

Harry Gunnison Brown was joined over the succeeding decades by a small group of economics professors who continued to make Henry George's case. One could argue that recessions that began again following the end of the Second World War would have been even worse if local governments did not capture some land rent via the taxation of real estate. However, as land prices climbed property assessments rarely kept pace. This made speculation in land an even more profitable investment.

Relying on out-of-date assessed valuations rather than current market values created a serious analytical problem for government statisticians. They simply did not understand that any increase in the price of land is inflationary and did not include such increases in their calculation of inflation. Another failure has been to accurately calculate the annual aggregate rent that is privately captured as unearned income (whether imputed or actual). Since the administration of Ronald Reagan, the federal government has not monitored land prices. The figures utilized in the econometric models relied upon by the Congressional Budget Office and the Federal Reserve are around 5 percent of the actual potential rent in the economy (see Joseph Stiglitz or Mason Gaffney on this particular problem).

I offer here a very rough estimate of the rent attached to just one part of the economy, the residential property market. At mid-2020, the median price of a single-family property was around $295,000. There are about 140 million existing housing units in the United States. If we assume a fairly conservative median land-to-total value ratio of 35%, this means that the aggregate residential land value in the U.S. is $103,250 per property, multiplied by 140 million = $14,455,000,000,000 ($14.455 trillion). Economic theory tells us that this aggregate land price occurs because of the capitalization of the net amount of rent that remains in private hands after taxation. If most or all of the rent were captured via taxation there would be nothing to be capitalized and land prices would fall to very close to zero. What the rent fund might be depends on the discount rate. If we assume that investors will invest in land if they can obtain an annual increase of 5%, the the rent fund would be calculated as follows: 5% of $14.455 trillion = $722.75 billion of rent JUST for the land under existing residential buildings. Add in the number of vacant residential lots around the U.S. and this figure will increase considerably.

Tragically, the public capture of land rent never became public policy, allowing the land market cycle to operate from boom to bust. It is on schedule to crash again in 2026. I have prepared a relatively short video in support of this forecast for anyone who reads this and has an interest in more details:


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kenzong 13/09/2021 - 4:02 Chiều

may 2010 ron hera : forget about housing, real cause of crisis OTC derivatives
30july1998 brooksley born : testimony concerning OTC derivatives
nov 1999: repealed Glass-Steagall Act
dec 2000 : commodity futures modernization act
2007/2008 crisis/meltdown
evidence of the looting @ bis.org, see for yourself the gigantic increase in OTC derivatives bets post dec 2000!!! is beyond GREED, it's CRIMINAL
housing triggered, but not the main cause of meltdown & trillions after trillions of bailout for bankers that cause the crisis, no executives prosecuted, laughing all the ways to the banks. made hundred millions bonuses generating the crisis, made millions after the crash, with the trillions bailout………the bottom 99% holding the bag o DEBTS

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hamish counsell 13/09/2021 - 4:02 Chiều

There is nothing more regulated other then nuclear power then the economy and financial markets of the world

Nicholas Lorenzo 13/09/2021 - 4:02 Chiều

@50:00 it seems that they have a disagreement on when the "bubble" started. The libertarian claims it was 1997, the keynesian claims it was mid-to-late 2003

Nicholas Lorenzo 13/09/2021 - 4:02 Chiều

@46:50 from a libertarian perspective I can see where Greenspan may have gotten this wrong. If fannie adn freddie didnt exist then we wouldnt have needed regulators because there wouldnt have been a bubble. However, fannie and freddie did exist and a bubble had alreeady occurred. So by the tim ethe damage had already been done in 2005/06 the only way to stop this result of government interfering in the market would have been another intruision into the market from Greenspan and the Fed.

Nicholas Lorenzo 13/09/2021 - 4:02 Chiều

the Soho forum probably holds the most professional debates ive EVER seen on youtube, thank you! Nobody can complain about the format of this debate.

Nicholas Lorenzo 13/09/2021 - 4:02 Chiều

@27:50 he displays a graph saying that fannie and freddie's share of the residential mortgage debt had dropped, but at any given time it still had 20% more of the mortgages and they had already increased housing prices through artificially increasing demand in years prior. Therefore the damage had already been done and the new influx of chinese money kept demand high. That is my understanding of what was going in right there from a libertarian perspective, If I got this wrong please somebody correct me.

Nicholas Lorenzo 13/09/2021 - 4:02 Chiều

I will say that chicagoan economists should write more articles about 2008, It took me like 20 minutes to find an article or video defending libertarianism in the 2008 financial crisis

Charles Vane 13/09/2021 - 4:02 Chiều

John Allison is talking sense. Mark is talking and is incapable of critical thinking or just playing the other side of the debate. If he works for Moody’s then his job depends on government regulation. Moodys has a government backed monopoly along with the other rating agencies and he’s not a “card carrying member of the free market”.

What I discovered from this and I don’t want to be mean, but I thought there were evil people behind the Federal Reserve system and the current monetary system. Mark just came across as incompetent and earning a great living from the system as it is. It’s not that they want to control people via a debt based currency, it’s the fact they don’t know what they are doing and they don’t possess the ability to see the whole picture and the idea of questioning it is just unbelievable to people like Mark.

School Sucks podcast did a great intro on an episode where they highlight Alan Greenspan and his “Fed speak”. He just spoke fancy words to politicians/media and what he was saying was complete nonsense and they just bought it. Greenspan admitted to deliberately chatting sh!t on purpose.

Book mark this part from Mark: 1:15:26 for proof of his and many others incompetence. Watch the next financial crash happen within 5 years (probably even sooner) and it be devastating.

Andrew Ryan 13/09/2021 - 4:02 Chiều

Of course the government fuck them

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Uber Genie 13/09/2021 - 4:02 Chiều

Many comments below focus on how simply the blame can be set. Like eager prosecutors armed with 10% of the facts they reduce counter-arguments to mere strawmen which of course are easier to knock down than the real counter-arguments. Enough of the intellectual and emotionally immature rhetoric.

Why did Fannie and Freddie take on such enormous risk in the mid-90s? They were extremely conservative with their portfolio of investments until then.

William Jefferson Clinton in 1994 announced that he would defund these secondary market programs if they didn't start taking class c and d credit loans in their portfolio. Partial and no doc loans appeared almost instantaneously. A friend who had mortgage operations in 22 states focused on C and D credit walked me through the legislation that kicked his business off and he had high praise for the government of Bill Clinton and later George Bush for continuing the government handout.

What happens when you force risk into any business run by humans? They derisk ASAP. As Fannie and Freddie issued mortgage-backed securities and sold them with false high ratings thanks to Moody's, Standard and Poor's, Fitch who took exorbitant fees to misrepresent C rated bonds as AAA, or AA. Reinsurers were brought in to transfer risk on portions of the portfolio, the reinsurers laid off their risk to a new product called credit default swaps, like other contracts (e.g. Commodities) these CDS were in turn traded as credit default options over the counter.

In 97 or 98 JP Morgan Chase created the first CRedit default swap (CDS). Sales of this type of derivative were $45million worldwide that year. By 2008 conservative accounts of CDS/CDO were valued at $25 trillion, that's right TRILLION and some accounts suggest the real number was $45 Trillion or the entire value of every company traded on every exchange in NYC!

Bill Clinton and later George Bush got what they wanted, upticks in popularity. The secondary market was forced to scramble to get rid of the risk. Imagine the initial cause as a huge earthquake occurring deep in the ocean. The wave takes time to build, and is not noticed by most until it hits land.

We do need guardrails against certain banking practices. But whether it be the SNL scandal of the early 1990s or 2008 real estate market collapse, the federal government seems to do 100 times damage then private enterprise run amuck. The federal government needs 100 times more restraint of even if its actions, albeit them well-intended (on its face).

The Federal government seems to always use citizens' money to bail out bad businesses. The banks in all cases should have been allowed to fail.

The car companies as well.

But the seismic cause of the 2007/2008 financial tsunami was Clinton's homes for all program and Bush's continuation of same.

J K 13/09/2021 - 4:02 Chiều

John Allison is the person who Trump should nominate to the Fed Reserve. Him, Jim Rickards and James Grant.

Marma 13/09/2021 - 4:02 Chiều

Jeeesus what a fucking moron Mark is. "The government saved the day"!

sonictech1000 13/09/2021 - 4:02 Chiều

One of the key ways that gov intervention distorts markets is by creating a false sense of security. Mark's presentation in front of the Fed illustrates this beautifully. Even Mark, an expert in the field left that meeting thinking that if these wise men of the Fed aren't concerned then maybe he was wrong and everything was fine.

Patrick Peterson 13/09/2021 - 4:02 Chiều

Very informative. In closing statement and others throughout by Mark Zandi, it is clear that he sees only positive things coming from government regulations, with no costs at all acknowledged to the system overall or individual participants: no stifling of creativity, no stopping of new investments, no channeling of capital to political vs. economic goals, etc. etc. What world is he living in, but one of a government fantasyland?

mesomelas 13/09/2021 - 4:02 Chiều

Central banking caused this problem, abolish central banking

j man 13/09/2021 - 4:02 Chiều

The southern guys accent speaks for his side of the debate

Russell Wilson 13/09/2021 - 4:02 Chiều

Analytical Economist vs. the Guy that actually runs a major bank

AgentOrangeCoughDrop 13/09/2021 - 4:02 Chiều

To a degree the lack of strict enough regulation (brakes) in which undercapitalized banks were allowed to hold and sell these ‘highly rated’ assets in the form of MBS’s when compounded with the Federal Reserves poor monetary policy following the dot com recession in drastically cutting back interest rates (acceleration) to spur immediate economic activity lead to the economy (car), especially the housing sector, being driven further by enabling further growth in sub prime and similar loans (drunk person) at high speeds careening off the cliff. The rating agencies such as Moody’s and S & P’s (police) could have acted as a buffer earlier in identifying the malfunction but did not.

Any questions class?

I think both proponents are attempting to square a single ultimate cause from what was actually the result of multiple independent sources, much like you only get a tornado from a specific grouping of independent weather. Ethics were in short supply and complicit negligence and indifference were rampant as greed and shortsighted outcomes were helping to blind the rot but some could see the storm building.

Sam King 13/09/2021 - 4:02 Chiều

As a former 'insider' I can say that everyone was at fault.

Regulators were absent
Loan agents were not qualified and only looking to make a quick buck. Same with brokers.

Management only saw profit

Politicians wanted homeowners for property taxes

Buyers wanted more house than they could afford.

Property owners wanted to keep up with the Joneses and over leveraged themselves.

Everyone faked everything and looked the other way.

… and the house of cards came crashing down.

OmegaTou 13/09/2021 - 4:02 Chiều

Zandi likes where things are at right now? WTF! The coming collapse is going to make the 2008 crisis look like a minor hiccup!

Niall Walsh 13/09/2021 - 4:02 Chiều

Their points are not contradictory. The government pushed hard on making banks lend to more people, and failed to at the same time regulate the lenders' prudence. The government sponsored enterprises had a non-prudent influence on the market that varied in size from 1990-2008. And the fed created the long-term problem of removing accountability from banks and others, but prevented the situation from devolving into Armageddon in the short term. They're both right

Libertarian Rants 13/09/2021 - 4:02 Chiều

It seems like Mark has a good grasp on how all the actors behaved, but seems to significantly downplay how much the government set the stage for all of it to occur.

C O 13/09/2021 - 4:02 Chiều

The subprime problem was itself relatively small. It was the derivative market that metastatisized it into the financial crisis. That is government problem but the explanation is too long to put down here

Adam D 13/09/2021 - 4:02 Chiều

Private sector bank originated loans but just flipped them to Fannie Mae. If you're to get a mortgage now you would originate at a private bank to get a Fannie Mae loan. They just don't do the bad subprime mortgages anymore because of Dodd-Frank. Yeah the same people saying we need to make these loans to people who can't afford them are the same people saying these banks are predators and must be regulated now.

Private User 13/09/2021 - 4:02 Chiều

Crony Capitalism meet Corrupt Government!

Josh Brackelsberg 13/09/2021 - 4:02 Chiều

Some people seem to be fundamentally brainwashed by the idea that the central banking method of operation isn't to pimp out the entire world and orchestrate booms and busts. The younger guy seems to be such a person. It's just not how keynesian and fiot money supply economics works. It's an exact formula for booms and busts, consolidation of wealth and power, and slavery. Slavery is intrinsic in it's very nature, everything else is actually just a side effect.

The older gentleman seems to be very much aware of this fact.

Josh Brackelsberg 13/09/2021 - 4:02 Chiều

The card carrying member blaming the markets, not the government is just a big fat liar imho for what it's worth.

PaperPlanesParadise 13/09/2021 - 4:02 Chiều

This is stupid, "It was the market system that failed, not the government". BUT the government was in charge of market system, stop sugar coating the government crimes, you dumbass.

Aaron Oneal 13/09/2021 - 4:02 Chiều

I love thes debate

Alex Minor 13/09/2021 - 4:02 Chiều

Wasn’t Moody’s the rating agency that gave AAA ratings to these Junk bonds.

MikeCharlieAlpha 13/09/2021 - 4:02 Chiều

This is a serious stretch.

FootballJunkie 13/09/2021 - 4:02 Chiều

This is a pointless conversation. No new information here

fuged aboud it 13/09/2021 - 4:02 Chiều

Two words: "Affordable Housing."
The whole crises was another affirmative action (redistribution) boondoggle with the gun of the state pointing at lender's head.
Zandi's solution to a flooding sink is to hand out more mops instead of turning off the faucet.

islandbee 13/09/2021 - 4:02 Chiều

I don't know how people could ever want to own a house knowing this information. Owning a real estate in this type of environment is like a ball and chain that is hard to let go of when you get locked in. I love all sorts of great homes, but the thought of being trapped is not appealing to me.

Ted Phillips 13/09/2021 - 4:02 Chiều

This is BS. The Democrat controlled government threatened banks with Federal intervention unless they made new loans to unqualified minorities. The Bush administration warned of the dangers, but the sexual predator, Barney Frank, head of the banking committee lied repeatedly. When things started going south, his accounting methods added trillion to the national debt your kids and grandkids will payback through devalued currency.

Thomas Welsh 13/09/2021 - 4:02 Chiều

Deregulation. I remember watching some Indian suit from one of the British multinationals saying that sub-prime was a thing in Asian markets and if we didn't open up to subprime then we would lose out. Then the deregulation happened. Then as we became more vulnerable, the insane equal opportunity mortgage rules hit. The whole thing went sideways. A few companies began to misrepresent their products in an effort to save themselves. And boom. Everything flew apart.

Jake Williams 13/09/2021 - 4:02 Chiều

20:43 And tell us, Mark, is the rating agency market free and open or is it a government-granted oligarchy that stifles rating competition?

Tim Brady 13/09/2021 - 4:02 Chiều

Sub prime lending was the governments brainchild ( politicians) and it got the ball rolling on this mess .

g 13/09/2021 - 4:02 Chiều

Please watch the Politicon debate between Ben Shapiro and TYT' Cenk Uygur, a socialost progressive. In that debate, Uygur describes a system in which you had socialism for the rich. If you agree that this is how the system worked, then you would have to agree that free markets were not responsible for the crash. In a free market, no reasonable lender would knowingly provide a loan to someone who has no capacity to repay. The risk of default was borne not by the lender, but by the govt.

Terrie Smith 13/09/2021 - 4:02 Chiều

It's the Federal Reserve and crooked government that's to blame. We, the tax payers, always get screwed and these bankers couldn't care less. We are slaves to them.

Raspian Kiado 13/09/2021 - 4:02 Chiều

Replace the Federal Reserve. It is a Private Company under a "government" control.


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