How a US housing bubble erased $11 trillion of household wealth
The 2008 financial crisis began with speculation on American house prices and risky subprime lending, then spread through mortgage-linked securities to banks worldwide. Some 8.7 million US jobs vanished, household wealth fell by $11 trillion, and governments spent trillions on bailouts to stop the system collapsing.
The roots reach back to the 1990s, when Congress loosened financing rules to widen home ownership, and to 1999, when parts of the 1933 Glass–Steagall Act were repealed so banks could combine commercial lending and insurance with investment banking and proprietary trading. As the Federal Reserve cut rates between 2000 and 2003, lenders pushed high-risk loans on low-income buyers, many from racial minorities, while regulators looked away. Austrian school economists blame the Fed’s long spell of cheap money above all. US mortgage debt climbed from an average of 46 percent of GDP in the 1990s to 73 percent in 2008.
Rates rose from 2004 to 2006, demand for housing fell, and in early 2007 subprime borrowers began defaulting; the lender New Century Financial went bankrupt that April. By August the contagion had reached global credit markets. Bear Stearns was sold to JPMorgan Chase in March 2008, the government seized Fannie Mae and Freddie Mac on 7 September, and Lehman Brothers filed the largest bankruptcy in US history on 15 September. The Fed rescued the insurer AIG the next day, and Congress approved the $700 billion Troubled Asset Relief Program on 3 October.
The damage was vast. The Dow fell 53 percent between October 2007 and March 2009, real GDP dropped at an 8.4 percent quarterly rate at the end of 2008, and unemployment doubled from 5 percent to about 10 percent by October 2009. Poverty rose from 12.5 to 15.1 percent. The IMF estimated that large American and European lenders wrote off over $1 trillion in bad loans and toxic assets, and Iceland saw all three major banks fail.
Reform followed: the Dodd–Frank Act in 2010, partly rolled back in 2018, and the global Basel III capital rules. Congressional inquiries published their findings in January and April 2011.
Source: 2008 financial crisis
