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Market History: What Led to the 2008 Great Recession?

Daryl Eckman shares his perspective on this important part of history here:



Transcript:


Hi everybody. My name's Daryl Eckman, Eckman Wealth Management. And today, I want to talk to you all about the financial crisis of 2008, otherwise known as the Great Recession. Why it happened? How did it happen? Maybe a few things we can learn from that. This goes all the way back to 2008. And arguably, we still are feeling the same effects from that period of time.


So it goes all the way back to the Clinton administration. There's plenty of blame to go around, but the Clinton administration wanted to increase owner occupancy of houses in this country from 60% to 70%. So the housing lending laws were relaxed during that period of time. People were applying for mortgages to qualify with just stated income, which means whatever they put down on their mortgage applications through a mortgage lender, they would just put down whatever they thought they could sort of get away with.


I hate to put it that way, but there was a lot of falsification or exaggeration of income and that at the time was not caught. It wasn't verified. So just stated income; didn't have to supply a 1099 or anything like that. That coupled with low interest rates, I think really hastened the real estate market. It started to inflate and we had what was called subprime loans, and that was for people that had poor credit and they were trying to get a house.


And so the banks would charge a little higher interest rate and even though the people were, I guess there was more risk involved that they would default. So that happened and it just started to set this thing in motion.


Fast forward to the Bush administration, and this was not corrected during the first Bush administration. Things were kind of kept pretty much as is. Things were going well. We had an economic boom from 2000, well, I would say all the way up to 2008, there was this great incline. You saw housing prices going up by large single digits and in some years double digits. And so you had these very low interest rates and things were just going great.


Well, there was a bump in the road that hit eventually that was going to have an impact that just absolutely rippled through the entire financial system because real estate is so much involved with so many things in the overall financial system. And it came out of the borders of this country into, well, it was already being done — the same kind of thing replicated, replicated in other countries. And so it went through the entire banking system.


So then came… the banks were failing, the small banks were all failing. The large banks were going through what was called the asset test. The Fed, the banking system, the bank regulators were shutting down the small banks and there was a huge bail out in the big banks. There was testimony before Congress.


It was just very acrimonious. It was crazy. I can remember sitting at my desk there, I think I was at Piper Jaffray at the time, and I remember seeing money being transferred from this area to that area. People were even wondering whether the US government treasuries were a good place to have their money. It was going into gold for a few days. It was it was really quite maddening. And it was really actually as a financial advisor, at my level, and I would say even up the chain, there were a number of people that were just scratching their head trying to figure out what was going on. The Secretary of Treasury under George Bush and the Bush administration went to Harry Reid and Nancy Pelosi... and he was asking for I believe the figure was $800 billion for the bailout. And then there was another something like $700 billion that was reduced to $475 billion that was later added to that. I think it might have been the at the beginning of the Obama administration.


So we had this this issue that was going on. It continued on. Nobody was buying any homes at that time. There was only selling going on. The banks were pulling in their lending practices. And you had bank examiners actually sitting right next to the loan officer; what little activity that was going on in the bank banking that the bank examiners were really not in the business of making loans. Their job was really to not make a loan, actually finding a way that they wouldn't be.


So we had the stock market that corrected to the point where we saw 40 and 50% retraction of the major indices and bank stocks were down 80%. It was just mayhem. We saw failures in Freddie Mac, Fannie Mae, which are quasi governmental agencies. We saw Lehman fold, Lehman Brothers, AIG. It was just very not pretty. And so the Fed started what was called quantitative easing, at that time. There was a lot of heavy handedness with the Sarbanes-Oxley initiative that was put into place on a six foot tall page of legislation that was put into place.


So then you had actually now a whole group of lawyers, attorneys that were coming into the banking system and also advising the remaining banks and what they had to do. So I'm going to stop there and just leave you to your own conclusions on how that was. In fact, I probably will do a follow up on this at some point in time and talk about how we have been we have worked our way out of it, but there still is some remnants of the financial crisis of 2008.


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