 Welcome back. I'm Jay Fidel. This is Think Tech. And more importantly, it's History Lens with John David Ann of HPU, a history professor. Today we're going to talk about the 2008 Great Recession. Lots to discuss on that because it has cast a shadow on American history. And the question, you know, however related or unrelated about inequality and including disparity of wealth. John, welcome back to the show. Hey, thanks very much. Great to be here. How are you doing, Jay? I'm good. So let's see. 2008, the Great Recession is something that I think about all the time because I keep looking for indicia, you know, that are left behind. Left behind was going to be a great recession. And now we hear from the White House that everything is just fine. So can you talk about the, you know, the causes and effects of the Great Recession of 2008? Okay, so we had this terrible recession. We call it a Great Recession because honestly it was like a Great Depression, only it was only a recession. Does that make any sense? Yeah, exactly. Of course. I love that for a circular reasoning. Anyway, so in the Great Recession we had a terrible downturn in the economy. I mean, the housing market dropped by 30%, sometimes in some areas of the country dropped by 50%. We had 10% unemployment. We had parts of the country that suffered from the kind of the recession until 2016, even during the election of 2016. And the three states that Trump really needed to win, Pennsylvania, Michigan, and Wisconsin, those states were actually still in a kind of mini recession left over from the Great Recession. So the impact of this Great Recession was tremendous. And, you know, an entire generation of young people who were kind of cut out of owning a home in the cities, the home ownership rates dropped under 50%. So it was this enormous cataclysm. It didn't go into a Great Depression, I think simply because the government acted quickly and made some pretty significant investments, you know, the Obama plan to bail out corporations and then the stimulus factor, those two things prevented a Great Depression and kind of this thing going really global and destroying the world economy. But in some ways we were in worse shape in 2008 than we were in the Great Depression. The amount of indebtedness, corporate indebtedness was actually far more than it was during the Great Depression. And so the potential was there for this thing to really unravel. The other thing, of course, that happened is the commercial paper markets froze up during the Great Recession. There really wasn't such a thing, at least not on a wide scale in the 1930s, but with the corporation with so much debt and with credit markets seizing up. We were really, we could have been a couple months away from a kind of an economic winter in the globe, which would have lasted a lot longer and been much more devastating. So there were some abuses, there were some practices and there was some, you know, phenomena that were happening up to the 2008 debacle. And the very people who, you know, wanted to bail out in 2008 were the people that created those problems. Can you talk about it? That's true, right. So this is really, in some ways, the Great Recession is about banks. It's about the banking industry and these bad practices of banks. So if we look at the causes, you know, why did this thing happen? Then one of the reasons why is because banks started doing things that were quite risky. And if we start with mortgages, this is the beginning of the story, really, because when George W. Bush won election in 2000, in the year 2000, and then won re-election in 2004, his idea was to grant people who had never owned homes before, to get them into home ownership and expand the level of home ownership to heights unseen. Why am I reminded of a chicken in every pot? Right, there you go. Everybody gets a home, no matter whether that person can afford it or not. Right, that's right. A chicken in every pot, right? Before the Great Depression, of course, Herbert Hoover in his inaugural talked about a chicken in every pot in 1929, and then, you know, months later, the economy crashed. Beware of politicians. That's one of the takeaways. So the banking industry got into some real question of practices with mortgages, and they started, first of all, they started giving mortgages to people who really shouldn't have a mortgage. These first mortgages were called Nina mortgages because that's an acronym that stands for no income and no assets. These banks began to give these folks who were Nina's mortgages. It's kind of astonishing. And then we move on from Nina's to Ninja's, and that's no income, no job, and no assets. Well, if a bank gave a mortgage, and these were not, well, you have to tell me, but I don't think these were all government secured, government guaranteed mortgages. But if a bank gave a mortgage like that, what in the world did it think would happen? This is against all the banking rules that you always hear about. Right, so okay, so part of it is that bankers were just doing innovations, right? They were, I think in some ways they were trying to fulfill Bush's pledge. And so the way this happens is that the guy in the ground has got a chance to sign up a lot more people to a mortgage, right? The mortgage broker is the guy in the ground. And so he likes the Nina in the Ninja. So he's doing all of this. And then what happens is the banks think they can handle these types of mortgages because these mortgages will actually be, what the banks do is they take these mortgages and they sell them. And in the process they bundle them with lots of other mortgages that are actually good mortgages. And so therefore you have what are called a collateralized debt obligation. And the banks were doing this wide scale with millions, actually trillions of dollars in mortgage. And so there were some people at the banks who actually understood that this was very risky. But I think most people involved in this just thought, hey, this is a way for me to make more money. And these things probably won't work, but it's a small part of this and no problems. Now when we look at, of course there were entities regulating the banks. Why didn't they catch this? Well, there's a couple of reasons. The first reason is that these entities regulating the banks, first of all, the credit rating agencies, right, standard in pours, moodies and fitches, right? Those agencies were looking at these big over called tranches of collateralized debt obligation, these mortgages packaged together. And all they saw was the good mortgages. They looked at like the top three or 4% of them and those were good. What they didn't know is underneath at 97% of these mortgages were starting to go bad. So that's the first system for reviewing the mortgages then. We're not looking at a good sample of the mortgages and certainly not looking at all of them. Exactly. They weren't going back in history. It's also true that the banks pay the credit rating agencies to get a rating. This creates a pretty strong incentive on the part of the credit rating agencies to actually, you know, boost up the credit or the rating of a particular bundle of mortgages. So you had all kinds of problems. The other problem you have is there was a government office doing this regulation of the banks. It was called the office of drift supervision. And we have a picture there if Eric can pull up the picture of these executives from that office and they're actually, there it is, right? So this is at a conference of the office of, that the office of drift supervision held and these are all these regulations that they're saying they have to cut through. Well, you know, the chain saw it was very dramatic. You know, everybody loved this. This was a time period of deregulation, but the truth is this office fell down on the job of regulating these banks because they didn't know any of this. They might have known they didn't do much of a job saying, hey, you got to stop these offering these questionable mortgages and then the way that these mortgages were put into these debt obligations. And so the debt obligations become a source of investment then. And that's how the contagion really spreads because it's one thing to have these, these, these mortgages that are bad but it's another thing if you're selling them and then reselling them and reselling them and that's what happened. Well, you know, what I get out of this is the certain culture developed under George Bush, or maybe even before George Bush, in terms of let's let's have everybody take a mortgage out, even those who shouldn't. And let's kind of try to cover that up by including it in a larger group of mortgages. And we'll sort of, you know, will will will will will will bury it in a in a crowd of bad mortgages. You know, it's like you make it up in volume, even though you know there's some bad ones in there. Then you have people who give bad opinions about it, who don't follow generally accepted accounting principles, who don't follow traditional banking standards. And at the end of the day, back in 2008, all those things had fallen away. And just like 29 we were living on vapor on fumes. And it was bound to crash. Right. Yeah, there was a lot of what we call water in the marketplace and and there was a lot of a lot of these banks were selling this water. And other banks were buying the water. The thing is you have what you have in the early 2000s is this enormous increase in the giant pool of money the global pool of money stands at about $35 trillion in the year 2000. And by 2007 that global pool of money has increased to $70 trillion. It doubles in a span of seven years. And this is really the work of the Chinese economy and the Indian economy, you know, just growing at very rapid rates. These guys have a lot of money that they want to, they want to invest right in these, these mortgage bundles they look pretty good they're what they're highly rated by the credit agencies so they buy them the Chinese actually do a lot of buying through Europe through And then American banks get into this and they're selling this and so yeah it's very dangerous because once the once the mortgages fail then what you have is this trail of companies that lose money. You know, you have the bank that issued the mortgage and then you have the one that bought the mortgage and so you have this kind of this multiplier effect so Now the other thing that happens is that the banks get into another very risky business which is called credit default swaps. And these are essentially bets these are hedges that you take on a on a company that you've done business miss business with. Mostly this is like, if your company decides to buy a bond, let's say of another entity and Okay, you bought their bond and you think it's going to be okay but you're not 100% sure you want to hedge that risk. You go and buy a credit default swap. That actually gives you money if that bond fails if the company fails to your buying you're betting both in favor and against at the same time. And there was a lot of this going on. This is the AIG story right this is in 2008 when, when, when, you know, Bear Stearns collapsed and layman brothers and then a bear Stearns was, you know, salvage tax and layman brothers just was simply closed. But AIG is the largest commercial insurer in the world. And they had credit default swaps of over $400 billion. And their entire equity was at $100 billion. So, they were way over leveraged in case the economy went bad. They were they were too big to fail right the old too big to fail and in fact they didn't they managed to avoid failing and they changed their name. What are they called now. Oh, I'm not sure of the name I mean you can still find them farmers I think farmers is the new name for AIG. They'll find them under AIG on the internet but right so what happens then is, so you've got this situation that just the housing market failures are happening in 2006 and 2007 so you've got that early on. But then as they accumulate and then these mortgages begin to fail then by by mid 2008 there are a lot of warning signs. The housing market is actually in a downturn in the United States at that point so that's really we're we're in a housing recession by mid 2008. So you have these investment collapses, and everybody's invested in everybody else, especially with these credit default swaps so you have some major brokerages fail you have a mutual fund that fails puts a lot of investors at risk. AIG is on the ropes, they've got to pay you know out of their equity of 100 billion they have to pay 400 billion and in credit default swaps and so they're looking to fail and that's when the government steps in and begins to to back up these these entities and that's probably what you're referring to, when we talk about too big to fail. And then the bad guys, getting a good deal the guys who actually created this recession actually getting a bail out. This happens with AIG to probably the biggest but it also happens with other banks. I mean, it's it's it's like a fire patrol quite frankly and in from September 2008, the government is really less worried about the fairness of it they're worried about the entire economy collapsing so we do they didn't really do a job at prosecuting people who should have been prosecuted right and calling it out against people who who should have been called out I remember a movie. I think it was called No Way Out done by Charles Ferguson, a brilliant documentarian and he was really good at interview. And he had the Dean of the Harvard Business School on there. And he said Dean, you know, I understand the day before Lehman Brothers failed. You gave them a letter telling them they were class A they were in good shape. And what kind of research did you do for that letter? Well, that was a muffled answer. And the day after the day after you gave them that letter saying they were in good shape, they failed. Can you explain that. And you know, the conversation trailed off from there. It was a brilliant movie. We can talk about that movie but you know the talk about movies john the upshot was a guy named Cyrus Vance. He was a district he still is a district attorney of Manhattan. And he he's the one prosecutor who prosecuted anybody. And as a result of the 2008 debacle and it was a Chinese bank in Chinatown was a movie made a documentary movie made about this bank. And it was a little wee tiny bank a family bank in Chinatown. So you have all this huge big multi billion trillion dollar banks, they didn't get prosecuted nobody got prosecuted. These few guys in Chinatown and by the way, the Chinese guys won the case. And Cyrus Vance failed. Yeah, so this is an issue I mean one person went went to jail right you know there were very few prosecutions. And I do think that the two big to fail phenomenon was there was on the minds of, you know, of the federal government when they were looking at the situation. One thing that Obama said is the problem is so many regulations were abandoned in the late 90s and the early 2000s that the laws by which you could prosecute these wrongdoers were actually gone. They were off the books. Interesting. So it was very difficult to prosecute them but it brings to mind I mean your point about the two big to fail brings to mind the question of why in the 1930s during the Great Depression, was that a time period when, when the United States became a place where it became more equal where inequality was reduced, because, well because of several things, but after the 2008 Great Recession then inequality was not reduced but it was in fact exacerbated. And I think you've touched upon one of the answers to that, the two big to fail phenomenon and the unwillingness of the government to really confront these wrongdoers in a way that would take them down, maybe take the banks down but maybe could do real damage to the economy. Maybe they should have, maybe they should have taken down, you know, Wells Fargo and, and you know, these other banks that's, you know, that were, that were just right front and center in this and were some of the wrong. All that considered, John, it sounds to me like, you know, inherent in what you're saying is this could happen again. This, this very set of circumstances could reappear and the same thing could happen. And, and what's interesting and you have to, you know, I'm not sure of this but I do recall that in the end, all the money that Obama gave those banks the bailout money was billions and billions of dollars. It wasn't all repaid. Some of them which are still in business have not repaid those monies. Okay, so in the case of the bailout, actually, the bailout actually made the taxpayers money. They pushed out about like $438 billion and they got back about $450 billion, $445 something like that. So, so they actually did make a little money on the, on the bailout. So, because, because the, quite frankly, a lot of these businesses, they were concerned about their image in the marketplace and so they worked very quickly and diligently to pay back their loans. But, you know, so, so that part of it actually worked and that's actually a misperception, a public misperception is that this, the tarp or the, you know, the bailout money didn't actually do anything it did actually save the economy that way. Well, you know, go to misperception for a minute John one other point I would really like you to talk about is, is the public reaction to all of this. So if I'm an ordinary guy on the street, I say to myself how could the government let this happen. The government was complicit in the problem maybe primary problem. And the government was primary and letting these guys off the hook. The government was primary and spending all our money to bail them out. And the government never did anything, you know, and left and left the field just sort of as it was, how can I be confident in government. And my question to you is, isn't it true that the great recession of 2008 was just another straw that broke the government's image in the mind of the, of the citizen and taxpayer. Yeah, you know, I think so yeah this issue of perceptions is very important. And I think the fact that the government didn't go after more of these wrong viewers really hurt the government's image. I think you're absolutely right Jay that that in the long run this what it did is it increased American cynicism about government. You help the, you know, the guy who's getting a golden parachute, you know, millions of dollars for him to step down from his position. And then us, the small guys who are losing our homes you're not giving us enough help so you had a definite perception from there and the way it worked politically is, you know, it should have worked with the Democrats advantage quite frankly it should have moved people into the Democratic category but I think here's where Obama, President Obama bears some responsibility because he wanted to be a fixer right he wanted to fix the divide between the parties but this was not the right time to be taking that kind of approach. It was a time where you really needed to take the conservative approach the kind of the free market deregulation approach which was being pushed by Republicans you needed to take those guys to task for having created this problem. So, I do think that heard. And I think that's part of why we have the kind of the political cycle that we're in right now is Trump was actually able to use the results of the 2008 recession and the fact that there are some areas that are still hurting to his advantage, even though he's from the party that actually caused this or, or primarily caused this. Can you connect that up with the subject we were also going to discuss, and that is inequality and disparity. How does that relate to the the recession and what happened after. Right so in really economic terms. The thing is, it wasn't just a great recession but in really economic terms the middle class has not been growing in terms of its income for a long time. It's been since since the late 80s that the middle class in this country is actually seen a significant growth in its income. I mean in the period before from the 1950s to 1970s. The working class really gained and the middle class did to working class incomes went up almost, almost 100% in that 20 year period. But in recent years and you see this, you see this, this graph up there right now, in recent years here's the, the household income. By rank and you see that those at the very top their incomes have grown almost 400% in recent years, whereas middle class people are pretty flat and actually poor people's incomes have actually declined in real terms, taking into account inflation so we're, you know, unlike the Great Depression, in which the government actually work to redistribute income and to to enfranchise lower classes. And in this case, the bailout did not do that now, you could argue there were there some other issues like, you know, Obama did health care and this helped the little guy, but overall the government's response to the Great Recession actually exacerbated, allowed the exacerbation of this income inequality that we're suffering in this country so yeah. The other political implications doesn't it. It does and I, you know, I think Americans are still angry, although I think they've, they're confused about, you know, where they're pointing their anger quite frankly, you have to be aware of right wing populism right. It's something that you have to be careful about because politics is the art of persuasion it's not the art of truth telling, especially when Donald Trump was involved, you know, it's, it's a problem but the other thing about this Great Recession is that we saw, you know, these these homeowners of color, African American and Latino homeowners, their wealth had been going up a bit in the 1990s. The Clinton administration put in place a tax credit that low income and African American and Latinos had been able to take advantage of this was basically nullified by the fact that they lost their homes and they lost a significant amount of wealth and so you actually see their, their wealth actually declining in the period after the Great Recession so, so for minority groups actually, they're in significantly worse shape. I mean, when you're looking at wealth of white people's wealth is in the range of $120,000 total wealth and you look at people of color and their wealth is in the range of $10,000 total. So, really, this this wealth gap is just increased. And it's, you know, I don't, I don't see any relief from that, at least not from this current administration. So how real is is Trump's claim that he's done lots for the economy, and that under his administration, the economy is doing much better. And for as long as he's in office to however long it might be, the economy would be going great. How valid is that claim given what has happened after 2008. So here, if we look at in terms of inequality, then the Trump administration has dramatically exacerbated inequality. They did this with the tax package that, you know, the Democrats call us the tax scam right. So the tax package included a big bonus for businesses and wealthy people, and estimates have the taxes that the tax benefit going 85% to the wealthiest people in the country 85% of that I think it was $1.5 trillion is going to go to people who really don't need it. And those who do need it, working people. Well, when you look on the tax form today, guess what's missing. It's the unreimbursed employee expenses category which was designed for teachers and working people that's gone from the tax form. Republicans took that out in a very kind of cynical move so, so they weren't even, they weren't even hiding this fact that this tax package was meant to put more money in the pocket of the rich and take money from the ports. And corporations, yeah, multinational corporations. Now you hear that the social safety net is being cut out of the budget that he just submitted to. Well, this is, so this has been kind of the stalking horse of Republican spending so you usually think about Republicans as, as, as folks who want to cut the budget and don't want to spend but that in recent decades the Republicans have pursued a strategy where they actually want to increase the budget. What they want to do is blow up the budget so you'll have no choice but to cut entitlements to cut Medicare and Social Security Medicaid. And this is, this has been their plan all along, and if they got a majority in both houses. And Trump is continues as president they will in fact do this you're going to find your Social Security privatized, you're going to find your Medicare greatly reduced. They've been curious about this they've been trying to do the two decades now and I know that if John C. Calhoun was alive today. He would endorse this approach, but then we would have another civil war after that. Yes, we might. John we have to keep on doing this. A couple of weeks hence we'll do it again we'll explore some other avenue. This is so valuable to know about it connect the dots. Hey Jay good to talk with you. The same here John.