Thursday, October 6, 2011

Who Profited From the Financial Crisis

Who really got rich off of the real estate bubble? You know about the real estate bubble… it’s the one that created our godawful financial mess.

I don’t want to rain on anyone’s parade, or anyone’s occupation either, but I would draw your attention to David Goldman’s excellent column where he explains what really happened.  

For those who want to base their opinion on facts, it’s high priority reading.

To be succinct about it, Goldman, aka Spengler, shows that American households profited much more from the crisis than did the banks.

In his words: ”American households levered a $6 trillion net inflow of foreign savings during the decade 1998 through 2007 into a bubble that benefited them far more than it did Wall Street. The impact of the bubble on the household balance sheet exceeds the growth in real-estate assets, moreover, because most small business expansion followed the housing bubble.

“For fifteen years we rode a tsunami of foreign capital pouring into American markets. We didn’t save a penny. Why should we? Our home equity was our retirement account. Our smartest kids got MBA’s and went to Wall Street derivatives desks. Engineering was for dummies. Home prices rose so fast that local governments swam with tax revenues and hired with abandon. Everybody went to the party. Now everybody has a hangover, especially the bankers. We thought we were geniuses because we won the lottery. Now we actually have to produce and export things, and we have to play catch-up. Our kids are competing with Asian kids who go to cram school and practice the violin in the afternoon. This isn’t going to be easy, and the sooner we decide to roll up our sleeves and get back to work instead of looking for bankers to blame, the better our chances of coming back.”


David Foster said...

But the household profit was in most cases transitory and unreal. People could in principle have sold their houses at overinflated prices and put the money in something more stable; few of them did. Much more common was a "strategy" of levering up to something larger.

A big part of the problem was that housing was sold in a way that would convince people that what was really mainly a *consumption* item was actually an *investment* item. There were few voices critiquing this in the general media, and not all that many even in the business media.

I expect that the way marital politics worked for most couples, the spouse wanting the bigger house--or the multi-house investment--usually won the debate, because it was so hard to go against the massed opinions of virtually everybody. Usually, but not always, the spouse lobbying for more housing "investment" was the wife...I know of one very sad case where it was the husband and ended in disaster.

Stuart Schneiderman said...

Thank you for clarifying the issues. I think it's also fair to mention that many households borrowed against their increased equity in order to support a more lavish lifestyle.

Of course, the equity in many of the major banks has proven to be transitory and unreal also-- from Bear Stearns to Lehman Bros. to Citi and Bank of America...