A Look Back On The Horrors That Led To The Great Recession
It's been a long road toward recovery since the 2008 financial crisis. The financial system is now more heavily regulated, the labor market is strong and nearing full capacity and GDP growth, though sluggish, was up 2.9% in Q3.
In recognition of the Halloween season Bisnow asked five top CRE economists to discuss the horrors that led to the Great Recession and whether the US has learned from those mistakes. Here's what the experts had to say.
"Two key factors responsible for the Great Recession are stupidity and greed and there is plenty of blame to go around. Shortly after losing control of the money supply, the Federal Reserve, despite warnings, ignored the run-up in debt instruments issued by investment houses and lost sight of even the most outrageous issuances.
The end result of the colossal failing hasn’t demonstrated that we’ve learned our lesson in any way. I suspect we are likely to have a repeat of this irrational investment practice but in a different way, some of which is evident in cap rate compression and others by the unintended consequences of zero interest rates."
"At this point in time the financial system is far more heavily regulated, limiting consumer access to credit, reducing the ability for large financial firms to leverage up and overall keeping far more scrutiny on the actions of players in the space.
As such at this point in time there is little to no likelihood of a similar downturn. But on the other hand the true underlying problem in the financial markets—a lack of true financial repercussions for individual misdeeds within the financial system—implies that there will be another financial crisis in some other part of the market. What it will be is anyone’s guess right now."
"Unfortunately the signs leading up to the Great Recession were all too obvious, and not just in hindsight. Broad swaths of the country began to suffer when the housing market bubble burst in 2006, and though we limped along till early 2008 it was clear that the balance sheets of major financial institutions wouldn’t survive without major damage.
That one-two punch of a housing market crash and a meltdown in financial services led to the most severe recession the US has experienced since World War II, and we are still learning and living its lessons.
On the plus side, US banks have been good at writing off nonperforming loans and moving forward—unlike European banks. On the minus side, despite the onslaught of new regulatory platforms designed to avoid a similar crisis, the definition of Black Swan events are precisely that: they are inherently unpredictable. Watch out for the next surprise!"
"The briefest summary of the financial crisis is that it was a run on the shadow banking system (sounds spooky, right?!). Once investors lost trust in the many asset backed securities that make up our new, more complicated financial system, the financial world seized up and the interconnectedness of the world financial system was exposed, in ways that were hard to correct quickly.
While the Federal Reserve has new powers to examine systemic risk, avoiding the next crisis will ultimately require global, coordinated effort. And just as we were caught off guard by the importance of CDO’s squared to the overall system, I have less confidence that we will be able to pick out what the next misjudged financial instrument is wherever in the globe it appears, and particularly how it relates to the rest of the global financial system."
"A number of factors led to the overheated housing markets that were a central cause of the Great Recession. First, anyone that wanted one could get a mortgage. Lenders were incentivized to make loans and encouraged people to borrow money to buy homes, whether or not they could afford it.
Loan securitization played a role. Traditional lending requirements went out the window. Lenders were making money by originating mortgages and weren’t keeping the loans on their books so they weren’t concerned about the borrower’s ability to pay.
Have we learned from our mistakes? Almost no one went to jail because of their actions, but lenders are much more cautious. It is much more difficult for borrowers to get credit today. We are unlikely to repeat the same mistakes, but there will undoubtedly be a “next time.” It will be caused by something different, something that isn’t currently on anyone’s radar screen."
