The 2008 financial crisis wasn't a housing crisis.
The housing market was just where it surfaced first.
Posted by Thick_Ship_9762@reddit | collapse | View on Reddit | 35 comments
Been sitting on this for a while because I wanted to make sure I actually understood the mechanics before posting. The standard explanation for 2008 is that banks gave mortgages to people who couldn't afford them, the housing market collapsed, and everything fell apart. That explanation is technically accurate and almost entirely useless for understanding what actually happened. What actually happened is a credit default swap chain reaction. CDS contracts are essentially insurance on debt one institution sells protection to another and collects a premium in exchange for absorbing the loss if the borrower defaults. When the mortgages failed, every institution that had sold that protection suddenly owed money it didn't have. Which triggered obligations at the next institution. Then the next. Bear Stearns was gone in 72 hours. Lehman over a weekend. The entire global financial system was 48 hours from total failure. Not weeks. 48 hours. Governments injected $20 trillion in emergency liquidity virtually overnight. Then they told everyone it was a housing crisis. Here's where it gets relevant to right now. The derivatives market was $600 trillion in 2008. The Bank for International Settlements puts it north of $1 quadrillion today. The six banks that were "too big to fail" then are three times larger now. The regulatory frameworks that were supposed to prevent a repeat have been progressively rolled back through three administrations. The same instrument that detonated 2008, credit default swaps is back. Larger. More interconnected. With fewer hard constraints than at any point in the last fifteen years. I keep coming back to one question nobody seems to have a clean answer to: what does the actual chain reaction look like in 2026 when the exposure is double, the institutions are larger, and the emergency intervention mechanisms are slower and more politically contested than they were in 2008?
Not asking for doom. Asking for mechanics. Does anyone here actually understand the CDS market well enough to explain where the structural weak points are right now?
FocusedGlitch23@reddit
All I got from this is insurance is a total scam which I kind of already knew
Causerae@reddit
What about the entire subprime issue? ARMs? Mortgages for more than appraised value?
NearABE@reddit
A six sided die has 1/6th chance of rolling the number 1 and 1/6th chance of rolling a 6. If you have a really big bucket of dice you can dump them on the floor and average the numbers. This will be right around 3.50000. For most people or institutions a risk is a bad thing. They are willing to, in effect, pay others to take the risks. You can offer people $3.49999 payouts and pocket $0.00001 per die thrown. You become a millionaire because trillions of dice are counted in aggregate electronically. You do not have to actually pick up any of the dice yourself.
In 2008 it became a situation where the dice were not random. A “credit default” is just a situation where a borrower fails to pay a debt. The odds of a default were calculated based on various input values. Some “assets” were just a blended aggregate of other loans. The blended assets appeared to have lower risk because they consistently paid dividends without default for a while. High risk loans to home owners were regularly paid off by the sale of properties. That can stop working all at once for millions of accounts simply because the property values dropped. It abruptly switched from millions of independent dice to one big die.
ta69ta69@reddit
Whatever happens, the Fed will happily print it away. Especially that public debt is getting out of control, a little hyperinflationary wave will not hurt in that context.
rematar@reddit
Search wallstreetonparade (reddit does not allow links from the website) for 19.87 trillion. That's the amount of money the Federal Reserve quietly created in 2019 to prevent a financial implosion prior to Covid.
Cultural-Answer-321@reddit
Yep. That is the last figure I saw as well.
nickiter@reddit
Your understanding is the same as mine - yes, mortgages were part of the problem because the underlying real asset (mortgage-backed securities) being insured by the swaps was housing, but the disaster was very simply a result of finance qua finance. The MBS were full of shitty loans and that risk was simply lied about; the rest of the system happily bought it and kept building the house of cards.
As for now... It's debatable, from what I understand. The markets for those types of securities are more transparent and trading of them is limited for banks that take deposits, which is I think positive.
Two things tho... Clearinghouses are getting really centralized, and the IMF among others has warned that a clearinghouse failure could have really big impact. Then there's private credit, which imo should be its own post and conversation, because they are a crazy source of risk in the economy. Between that and crypto, a lot of the transparency we want does not exist... For trillions of dollars. We don't know where it's invested, or how. Big fuckups in those areas could rogue-wave the entire system.
Thick_Ship_9762@reddit (OP)
"Finance qua finance" is exactly the right framing. The housing market was the accelerant not the engine. The clearinghouse centralization point is underrated. We moved to central clearing after 2008 specifically to reduce bilateral counterparty risk, which it did, but now that concentration means a clearinghouse failure isn't a contained problem, it's a single point of failure for the entire system. The IMF warning on that has been sitting in their stability reports for years and almost nobody talks about it outside of risk management circles. The private credit point deserves its own thread honestly. $2 trillion market, doubled in four years, essentially zero real-time price discovery, no meaningful transparency requirements. When those loans start defaulting in a real downturn nobody's going to know the actual loss number until it's already propagated through the CLO layer. That's not a known unknown. That's a structural blind spot built into the architecture. The crypto piece I'm less certain about in terms of systemic contagion, the 2022 blowup was contained relatively quickly. But if crypto becomes more deeply integrated into traditional finance infrastructure before the transparency problem gets solved, that changes the calculus completely. Rogue wave is the right metaphor. Not a slow build you can see coming. Just suddenly the entire system is underwater.
pc-erin@reddit
Dude, at least try to make it looks like a chatbot isn't doing your thinking and talking for you.
fedfuzz1970@reddit
And then there are the loan facilities that were created to fund the tariff payments owed by importers due to Trump's tariffs. All paid for by end purchasers.
Cultural-Answer-321@reddit
Exactly. The CDS were poison pilled and it bit every big financial company in the butt.
The myth that it was over-leveraged defaults by the lowly single buyer was created to deflect the real blame from financial companies not doing their due diligence. And don't think they didn't know. The idea was, as always, sell them to the next sucker and not be the last to hold the bag.
Livid-Rutabaga@reddit
the bigger fool theory?
Cultural-Answer-321@reddit
It's the engine of the world economy.
DocWallaD@reddit
Pretty much the same but with commercial real estate instead of the consumer housing market. They're called CLOs now.
Thick_Ship_9762@reddit (OP)
Right, CLOs instead of CDOs. Same tranching logic, same opacity problem, same "we'll know the real number when something stops moving" dynamic.The difference that worries me is the rate environment. The 2006-era MBS were written when rates were relatively stable. The commercial real estate loans sitting in these CLOs were underwritten in a zero-rate world and are now being serviced in a 5%+ environment. That's not just a price correction. That's a structural mismatch baked into the instrument itself.
Office vacancy at 20%+ in major cities means the forward cash flow assumptions in those structures are just wrong. Not stressed. Wrong. Right, CLOs instead of CDOs. Same Tranching logic, same opacity problem, same "we'll know the real number when something stops moving" dynamic. The difference that worries me is the rate environment. The 2006-era MBS were written when rates were relatively stable. The commercial real estate loans sitting in these CLOs were underwritten in a zero-rate world and are now being serviced in a 5%+ environment. That's not just a price correction. That's a structural mismatch baked into the instrument itself. Office vacancy at 20%+ in major cities means the forward cash flow assumptions in those structures are just wrong. Not stressed. Wrong.
wulfhound@reddit
Is that why high vacancy rates are failing to deliver front-end price corrections?
Under classical supply-and-demand capitalism, if there is oversupply, the price falls.
That doesn't seem to be happening with prime office space - nor retail, for that matter. There is clear evidence of oversupply, as well as active attempts to reduce supply (never-ending "renovations" which takes space out of the market), yet prices remain close to historic highs. Seems the behaviour of sellers who'd rather maintain an illusion of value than actually make a sale.
Nobody wants to admit that their "$60 psf" asset can actually only reliably fill at $30 psf.
Cultural-Answer-321@reddit
What's the old saying? "The market can stay irrational longer than you can stay whole."
imaginaryraven@reddit
I see you used ChatGPT (or another LLM) for this comment which makes me distrust the information in it because ChatGPT gets a lot of things wrong. Do you have a source?
nickiter@reddit
I think this whole thread might be AI 😕
UninvestedCuriosity@reddit
It's not just an x, it's a y!
Cultural-Answer-321@reddit
Yep. It's another disaster looking for a place to happen.
R3StoR@reddit
Which sort of ironically reinforces OP's point though!
SukFaktor@reddit
Data is from October of last year.
One might ask themselves why if they are not paying their loans doesn’t the bank collect/reposes? 🤔
Possible reason:
Well if they did put these into default and reposes the banks would have to sell the properties on the open market to try to recoup the costs. Unfortunately for them that would mean doing an honest reevaluation of the properties on a market basis instead of on a “rent generation” basis. This could put downward pressure on pricing which then affects all the other “assets” that are often used as collateral.
In a world where less people in the US are working, businesses have adopted work from home, and AI is putting downward pressure on employment does anyone think office space is currently a valuable commodity?
SukFaktor@reddit
One example I was able to find of what happens when a bank tries to recoup their losses.
Sold in 2006 for 332 million. Sold at auction in 2024 for 8.5 million.
Goatmannequin@reddit
Create problem, print money, get rich. It's functioning as designed.
rematar@reddit
Here's a recent opinion on that topic.
https://open.substack.com/pub/dollarendgame/p/financial-gravity?utm_source=share&utm_medium=android&r=2lkom0
Livid-Rutabaga@reddit
they all know the end of the spiral is coming, they just pawn it away so somebody else takes the loss
norfolkgarden@reddit
This edit explains the "side bets" problem better.
https://youtu.be/dWS2kLa5tAo?si=x1kuUWssyoabjRfe
"How much bigger is the market for mortgage bonds than the actual mortgages?
About 20 times."
Horrific and amazing movie. Both because it was true, no one went to jail, and the movie used celebrities to explain really 'boring' concepts. They needed to attempt to hold our attention somehow.
Livid-Rutabaga@reddit
Not only that, the cycle continues repeating like nothing ever happened.
fedfuzz1970@reddit
Following the banking crisis 2008-2009, Congress changed Dodd-Frank to allow bail-ins by banks that are facing insolvency. There will be no bail-outs by government in the future, depositors will be classified as unsecured creditors and their deposits as credit obligations of the bank. In a bankruptcy, depositors will rank below derivatives, well down the list of those with enforceable claims against the institutions. These two articles by Ellen Brown (Web of Debt Blog) explain bail in and the blow up in derivatives. The implications are frightening to me.
https://ellenbrown.com/2023/02/25/what-will-happen-when-banks-go-bust-bank-runs-bail-ins-and-systemic-risk/
https://archive.org/details/TheyOwnEverythingIncludingYou/mode/2up
alloyed39@reddit
No one understands the CDS market, which was a big reason for the severity of the original crash.
sorry97@reddit
Try to learn the basics of FOREX, as this summarises the economic stuff with ease.
Pretty much all banks (and us too!) have some kind of leverage. This is credit, you’re borrowing money from… who exactly? It’s supposed to be a bank (lender. Well, in reality it’s money from other bank users, but you get the idea), in the end, you’re borrowing money from the future you (which means you’re robbing yourself. You have to pay off this loan with money, the bank makes an earning on interest).
Since most things operate on “imaginary money”, you only materialise earnings/losses after a transaction is made (BUY/SELL), otherwise, money’s in a limbo of fictitious amounts. This is when things get complicated, as you can use “real” $1,000 USD, to make more profits (you can use it to borrow $10,000 USD for example), but if this issues materialise, that means you’re now $11k in debt! As you lose the original $1K AND now have to pay the $10K you borrowed!
What causes collapse is pretty much what you pointed out: LOTS of people/entities have to pay at once, which means there won’t be enough money/supply at the bank, which will borrow from somewhere to give you this money, and on it goes.
Structural weak points are the “main providers” of these giants, remember that wealth is funneled upwards. Once they’re unable to keep up, banks will attempt to collect from the next, but the next (aka bigger fish) won’t have money either cause the smaller fish ran out, and that’s pretty much how it unravels.
norfolkgarden@reddit
It looks like you have discovered this.
https://youtu.be/0X0-NpZpx6U?si=IU0w39XrhaAF-r83
There are a few better edits. But I couldn't find them quickly.
This is the MISSED heart and soul of the movie "The Big Short".
Also watch "Margin Call" just for the voyeurism.
Metalt_@reddit
Im definitely no expert in this area but it's my personal opinion the major players will use the next market implosion as an excuse to abandon the petrodollar and implement some/multiple cbdc's to further the stranglehold on people's economic mobility under the guise of security. Hence the ai datacenter push now. As for failure points the other commenter was right about commercial real estate, but the real disaster is going to be the endless derivatives that make up a disturbing amount of the valuations of pretty much everything. What comes after is anyone's guess
Thick_Ship_9762@reddit (OP)
Found a documentary that goes through the actual chain reaction mechanics in detail the CDS propagation, how the 2008 intervention worked, and what's structurally different about 2026: https://youtu.be/W5hA6eR6j4I The BIS data section is the part worth paying attention to