What Caused The Financial Crisis of 2008?

In todays video we will discuss the Credit Crunch, and the role played by credit derivatives and securitization.

Credit Derivatives and the Financial Crisis of 2007 -2008

What Caused the Financial Crisis of 2008?
Easy availability of credit in the United States, fueled by low interest rates and reduced credit monitoring by financial institutions, led to a housing boom which facilitated debt-financed consumer spending. The existence of credit derivatives and securitization allowed financial institutions to make larger volumes of riskier loans than had been made in the past and consumers assumed an unprecedented debt load.
Between 1998 and 2006, the price of the typical American house increased by 124%. Between 1981 and 2001, the national median home price ranged from 2.9 to 3.1 times median household income. This rose to 4.6 times median household income in 2006.

When home prices declined in the latter half of 2007 and the secondary mortgage market collapsed, a global financial crisis was triggered. Credit derivatives were blamed by many for bringing about this crisis, or for intensifying it.

Credit ratings agencies are widely believed to have failed the markets in their calculations of credit risks on credit derivative products in the lead up to the financial crisis of 2007-2008. They relied on models that were given to them by the credit derivative issuers. The fact that they are paid by the security issuer, rather than the buyer, brought their impartiality into question. There is a structural conflict in this market whereby investors are the beneficiaries or ultimate end users of credit ratings calculations, yet the party paying for the ratings themselves is the issuer.

On the back of the financial crisis, politicians and regulators globally are pressuring originators to resume the former practice of maintaining at least some of the credit risks on the instruments they originate on their own balance sheets. Politicians face a trade-off of hoping to incentivize high consumer spending and home-ownership rates to boost GDP and achieve social goals associated with home-ownership while seeking to avoid the negative outcomes from widespread over-indebtedness from lax credit standards and real estate bubbles. Stronger credit controls stabilize an economy but reduce home values, decrease homeownership levels, and reduce an economy’s GDP growth.

[jamesy]

Your channel is criminally under-viewed Patrick. I look at your channel almost daily hoping for a new video. Keep up the incredible work!

[mastpg]

Honestly, this looks like a hostage video. I'm glad you've taken pandemic time to upgrade audio and set decorations.

[Dwightstjohn-foki]

My younger brother is Seattle (in mortgage after market placement most of his life) lost his SECOND house and all the "family legacy' money playing options. In 2010 he "pronounced" that the Seattle housing market wouldn't recover for a decade. His house he lost recovered all it's value in less than eight months. So much for being an "expert" in his field.

[markrobson]

God bless you Patrick, so many will not understand your explanations bit the beauty is so many will be saved because you did such clear education.

[smcasas]

Generally I would say that these innovations give investors a false sense of security along the lines "this time will be different".

[MA-goee]

I really hope you mention how the Govt kept pushing institutions to lower lending standards. Barney Frank kept pushing even when the Bush administration warned of a possible crisis in the making.

[kingclover]

That was great . And the reason it was great is because I could actually understand it. Usually financial stuff just goes right over my head, and I never really understand it. But I was actually able to follow this. Which is good, because I've been wanting to know about this kind of stuff for the longest time.

[udayhomeful]

Wow! 3 yo video. You look different but sound the same. Same dark humor tone.

[DimitrisAndreou]

I don't see an answer to the main question though: what was so special about the loans that they became NPLs en masse? That some derivative products on top of the loans were impacted, is only a secondary effect.

[ducknorris]

I refinanced my mortgage in 2006 and the loan officer was incredulous that I wouldn’t take a Variable Interest Rate loan. He tried super hard to sell me on a Variable. I didn’t take it but not because I foresaw a collapse but rather I would sleep better knowing what my mortgage would be each year.

[steveh]

Sounds like US student loans. The school's interests are not aligned with the student's ability to pay it back.

[Chris-kmck]

Yet again, not a single minute wasted. Such purely good information....just excellent

[luisquintino]

going through the older videos and they are very informative, educational and to the point. Very undervalued Please keep the quality

[CJBroonie]

Some are supportively mentioning how Patrick upgraded his videos. I like his recent videos but also love the older ones. They’re direct, informative, and educational. Don’t compromise the quality. It’s why I subscribed.

[andreipopescu]

If there's no mention of Freddie Mac or Fannie Mae I'm afraid the explanation is going to be incomplete. And fundamentally so! the video becomes a waste of otherwise good explanations and notions.

[ifh]

23:38 "The credit crunch was the most remarkable period that many investors may ever experience." It might be debateable but 2020/21 beats 2008/09 for me.

[Datamining]

Buying our first home in 2004, we were more or less told that our application didn't matter and we should just write whatever we wanted. No income verification was ever done that I can tell. We were also told that a ridiculous loan-to-income ratio was fine. We weren't subprime in any way so it didn't matter and we didn't do any of that, but I can absolutely see how people were mislead.

[markhathaway]

Are the public at large served by the constant creation of new financial products which certainly make their sellers profit?
Where have they moved too far from the real economy and serve the financiers and not the real economy?

[antonomaseapophasis]

The day when BNP Paribas couldn’t value a CDO because the value was going down, values had only gone up previously.
That is the moment I would like to see discussed.

[jeffbrownstain]

Wow, you've changed so much in just three years..