A Decade After the 2008 Housing Crisis

Patrick Feng ‘20

For a new generation of students, much of the early 21st century is a distant history; perhaps a story written by an author with a knack for continuity and detail. The class of 2020 was the first for which 9/11 happened before our birth. For us, it is easy to forget the struggles and cautionary tales of the past. Just ten years after its occurrence, The Great Recession is already receding from our minds. It is important to remember the causes and financial devastation in the aftermath of this fateful blunder on the part of the American people.

The housing market collapse was the result of the formation of a financial bubble caused by faulty decisions from banks and homeowners. Towards the beginning of the crisis, housing prices were on a natural rise due to supply/demand relationships. However, banks saw an opportunity to take advantage of their patrons when they took out loans for their houses. Because a borrower can default on a mortgage, voiding them of any obligation to pay back loans, banks are usually cautious about who they lend to. However, there is a catch to defaulting. The defaulter must yield all previous payments and the house to the bank. Because of rapidly increasing housing prices, the bank would either get its mortgage, or a decent investment in the form of the house. This fail-safe led to lenders giving out loans to anyone who asked for them, including those who had no chance at paying back their loans, since banks could earn the house at a high price and some bonus interest. Although the bubble flourished in the short-term, it popped as soon as house prices began to drop. Because people no longer had monetary incentive to keep paying mortgage payments for the house, most homeowners defaulted, leaving banks with many expensive houses with rapidly decreasing value.

Jonathan Liu ‘20 suggests that the banks were to blame for the failure of the housing market. He argues that it was very shortsighted for the lenders to “give loans to everyone, even if they couldn’t pay back the debt or didn’t even have a job, because everyone would just stop paying the loans back”. Instead of responsibly choosing people to give loans to, banks bet on the continual rise of prices, without considering the effect that their own actions would have on the system. In a way, they were pushing the probability of failure onto the next person, trusting that the housing market was large enough to support another player. According to James Feng ‘18, the U.S. government was also to blame for its lack of adequate laws protecting the housing industry. “It was because the government wasn’t hard enough on the banks, and the banks knew that they would get bailed out even if they failed”.

Although the 2008 crash sent millions into joblessness and into debt, it seems like America has already forgotten its lesson in trying to game the system. An unprecedented new way of exchanging money, cryptocurrency, has overturned the financial game. “Average Joe” prospectors have collectively hedged billions of dollars on Bitcoin, Ether, and Monero, similar to how much of the public, especially those with no business buying houses, took out unpayable loans in the years leading up to 2008. Recently, Bitcoin has experienced incredible growth that some experts say is the unnatural buildup for a bubble and subsequent market crash. Many investors joining the Cryptocurrency market hope that the institution of Bitcoin is “too big to fail” and could support just one more player. This was exactly the type of thinking that led to the collapse of the housing market, which many regarded in the same way.

Bitcoin is stepping into uncharted territory, and should be treated with caution. Restraint from average citizens would have prevented the crash of 2008, and can save the cryptocurrency market even if it crashes. The best way to predict the future is with the past, since history inevitably repeats itself, and Bitcoin seems to be following in the footsteps of the housing market in 2008.