Credit Growth and the Financial Crisis: A New Narrative [pdf]

This is an odd way of framing it (the NBER article isn't quite so slanted).

If you were leveraged in 2008 you were more likely have (on paper) a high credit score (with assets far in excess of liabilities). But you were also going to get hammered, and be more likely to hit a cashflow wall. If you had a job, one house, and one loan, you probably weathered the storm.

It's a little odd to frame that as "poor" vs. "investors," though. The anecdote that always struck me from Lewis's Big Short was that toward the end, lenders were pushing recent immigrants to start no-money-down rental empires, because recent immigrants haven't been here long enough to have credit hiccups -- so they start with high credit scores, even at modest incomes. And for every high credit score loan, the CDOs could launder multiple C-grade loans into a AAA security.

The systemic problem was bad securitization math, which led to unsustainable returns in housing investments. A significant element of that was enticing average Joes to over-leverage themselves like "investors."

(The idea that Community Reinvestment Act lending was anything as systemic as the rating errors is totally bogus, as far as I can tell).

Do people really associate subprime loans with poor people? This article is the first time I've ever seen subprime described that way. I've always taken it to mean any loan where the borrow is stretching themselves too thin or where there is low or no down payment.

We changed the url from https://qz.com/1064061/house-flippers-triggered-the-us-housi... to the original source. Hopefully this will make for a more substantive, less sensationalized discussion.

It was similar in the UK. House flippers fuelled the bubble. Eventually, it got so big, that even the common man on a reasonable salary was struggling to afford a home. Mortgages still got approved, and sure, people with lower incomes would be the first to default, but they were clearly not the cause.

tl;dr: the biggest growth of mortgage debt during the housing boom came from those with credit scores in the middle and top of the credit score distribution—and these borrowers accounted for a disproportionate share of defaults

It's silly to think there is a single thing that caused the recession. It's a nice narrative to have a singular reason and lets you tell a story. But there's a million reasons it happened.

Rapid expansion of credit strongly correlates with insolvency.

There's an excellent paper by Gudrun Johnson back when she worked at the IMF that captures it in the sovereign insolvency context.

Blaming house flippers is like blaming a pastry chef for my extra pounds on the waistline - it's a side show, to the real cause.

oil prices reached record levels before 2007 financial crash. Then western economies were being forced into recession by the rising cost of energy and responded by hiking interest rates - that then triggered mortgage defaults and over-leveraged borrowers throughout economy collapsed.

We are and always have been reliant on oil - it's not determinisim but it is dependency.

When oil prices go mad, so do we, and if we are over stretched it breaks us.

We are still over stretched (personal credit at all time highs etc)

And oil has very few places to go but up over long term.

Wait wait wait. No one thought poor borrowers that caused a nationwide housing market crash.

Furthermore, I don't think house flippers created an industry that needed an ever-increasing supply of loans for securitization and corrupted lending institutions with that demand either.