The Great Recession

Our latest video from Marginal Revolution University covers the Great Recession and financial intermediation. It draws from our popular textbook, Modern Principles of Macroeconomics.

It’s an interesting process working with our creative animation team. We don’t always know what is possible let alone what works best in this medium and they don’t always know the economics so we have lots of discussion about the visuals, the pacing, the storytelling elements, the sounds and the music. It took us quite a while to get this video right because it covers a lot of material and we had to get the animations precise to correctly convey the economics but we are pleased with the final result.



Thankfully we allowed the free market to punish the banks, credit agencies, and other bad actors that made all these foolish decisions, so it will won't happen again in the near future.


Yes, I'm glad you're the point man on comments.

Video started slow. Finally at 8:40 mark the 'panic affecting all economic actors, even sound banks' meme was mentioned. @11:20 remedies finally mentioned, a bit late. Less leverage as 'solution' debated, so TC fails to mention any real remedy.

I would give the video a "C+". Too many shots of TC, who is starting to get a slight paunch and double chin, not enough video.

The video is suspiciously similar to this Oct 2015 basic video: by a firm called CrashCourse.

All in all, a very basic video and a bit of disappointment.

For how charitably he cites/acknowledges you, this is cold, dude.

Ray is a big fan, in the same way your cat is a big fan of you.

He pees on Tyler's bed?

That and he coughs up hairballs (posts) all over Tyler's place.

There are two kinds of economists. First, those that dole out favors to their followers who praise them, and this would include the great Milt Friedman, the great Murry Rothbard, and the great John Maynard Keynes, along with the other greats of yesteryear, but apparently not the great Friedrich August Hayek, who was more modest and did not reward his followers too fulsomely, but including the great Ludwig von Mises, though he too was a scholar and gentleman and not just a partisan, and including the great Rose Director as well as other luminary greats that time (and my own ignorance) does not allow me to present. Second, those that simply go wherever the facts lead them without partisanship, fear or favor. In that second class of economists, I would put Tyler Cowen. He's not great but he serves a useful purpose as a sort of free-market oriented referee of competing interests, with a slight right-wing bias, which is understood by his readers in a Straussian way. Make sense? Beer. Beer sharpens my mind.

Are you serious? I don't think huge bailouts are considered "punishing" the banks. If this is what most people think, it is inevitable we will have another crash soon. One of the main problems that caused the 2008 crash - moral hazard - that Tyler mentioned in the video has not been addressed since the crash.

Is there an enumerated law describing how, on the internet, even the most transparently facetious statement requires someone to not get it and then restate the point in non-facetious terms?

Sarcasm is the lowest form of humor, im sorry. In fairness to the bailouts im under the impression weve recovered our money from aig, et al, and that the real concern was credit tightening, which we avoided.

That being said, i dont know any flesh and blood entity that supports them even to this day. My fears of inflation were wrong, but the moral hazard is very real and accurate. In addition to people thinking the system is rigged, bailouts for me but not for thee :)

We dont know for certain what the alternate timeline looks like when they never happened. I imagine a much harder landing but a more pronounced and fundamental recovery.

>> My fears of inflation were wrong

Maybe just early.

Any time now since 2007.

Well, that's still my mindset, but given the evidence I must admit my predictions were wrong. Justice too long delayed is justice denied, and predictions mis-timed are false predictions.

I also did not foresee a flight to safety in the USD when the Euro got battered by Greece, nor the Chinese 'market' getting corrected. So yes, I maintain it's not the USD that's strong, but we're the least weak. I'm not omniscient, so it doesn't bother me acknowledging when I'm wrong.

What is this about justice? What is just in this situation?

Sorry, shoddy analogy. Justice is time-sensitive. Predictions are time-sensitive. That was all I was going for.

IMO the counterfactual where we let the system crash would not have meant a stronger recovery. The 'low everything' (rates, growth, productivity) worldwide is due to demographics, the Japanization of the advanced economies, not moral hazard. Note the US is the best of a bad lot, because our demographics are less 'Japanese' than, of course, Japan, but also Europe.

> "We don’t always know what is possible let alone what works best in this medium"

Same problem with a lot of creative-ish work. Try commissioning some custom software for your business. You have an idea of what the business wants, but you don't know what is/isn't possible with the technology. Meanwhile the software engineer knows exactly what is/isn't possible, but has no idea about your business needs. Solve for equilibrium, as they say.

This problem is infinitely worse in government software procurement. Remember the first version of

A very good video of the financial collapse. What it doesn't address is the speculative fever itself, a fever that would cause otherwise rational investors to abandon traditional rules for investment and instead opt for speculative increases in asset prices. Was the speculative fever caused by a virus, like Zika, that spread throughout the land? Or were there more fundamental causes of the speculative fever? For example, the rate of return on productive capital had been in a long slow decline, which may have induced owners of capital to seek higher returns through speculation in asset prices. This was also the era of the development of the large equity and hedge funds, which sought higher returns not through rates of return on productive capital, but through speculative investment in entire companies that they bought and sold, deriving returns not from the earnings generated by the companies but speculative increases in asset prices (whether the assets owned by the companies or the stocks and bonds that represented ownership of the companies). Of course, this is also the era of the global savings glut, in which the amount of capital available for investment far exceeds desired investments, leading many owners of capital to rely increasingly on speculative increases in asset prices. Tax policy may also have contributed to a speculative fever, as capital gains (i.e., increases in asset prices) are more favorably taxed. The video does mention that managers at places like Lehman were rewarded for taking risks (i.e., for speculative investments) when asset prices increased but were not punished when asset prices fell, but that doesn't explain why speculation in assets prices would become the dominant form of investment at places like Lehman. Indeed, even today, so soon after the financial collapse, owners of capital are investing in companies that have never earned a profit and are not projected to earn a profit in the future, and they are doing it because of the expectation that future investors will pay ever increasing prices for the assets.

But Fama won the debate!

Up to 2006 there was enormous money to be made in that speculative market. Then after 2006 as housing prices peaked and started decreasing, the only way for over extended banks, lenders and borrowers to survive was to bet even bigger, take even more risk with the possibility of a payout that would save their hide.

In retrospect, those who bet big enough to risk the survival of a large enough company won. Someone else came along and bought all your trash.

If you are in that market, those really were your only choices. There were a few who had the fortitude to short the market. The only rational thing was not to participate.

Don't get too focused on housing, which was just a part of the speculative fever in the run up to 2008. Funding of the housing speculative fever (i.e., the bond speculative fever) was a bigger part, housing merely the product that justified the speculative fever in bonds. Of course, there has to be a product to justify the speculative fever, as direct marketers know too well - if there's no product, then it's nothing more than a scam, the pyramid collapses, and the perpetrators go to jail. The bond speculators (bankers) didn't go to jail because there was a product; Glenn Turner went to jail because there wasn't.

Haven't heard mention of Glenn Turner in awhile.


I wonder if Melania uses Koscot Cosmetics.

While this video does a good and clear job in explaining the financial crisis, it doesn't explain The Great Recession. Prior to 2008, our economy became use to an to an annual growth rate of about 5% in nominal GDP. The Fed allowed this trend to suddenly decline in 2008. It was the drop in nominal GDP that caused The Great Recession. It is the supply of and demand for money that determines nominal GDP. It is the Fed that controls the money supply and it is in their power to offset changes in the demand for money. The Fed caused The Great Recession.

Thanks to Richard A. Above:

Clear, Simplistic, Black & White & Almost Certainly Incorrect

Abolish the Fed!


The Fed raised the Fed Funds rate to 5.25% in late June 2006.This immediately produced an inverted yield curve.

During the summer of 2007, as the housing crisis peaked, the Fed was still worried about inflation and held tight at 5.25%.
It wasn't until September of 2007 that eh Fed signaled its first move in the opposite direction, lowering the FFR to 4.75%.

The Fed was slow and timid all the way down. As late as the June 2008 Fed meeting, there was lots of hand-wringing in inflation. The whole point of the Fed is to provide liquidity in such circumstances, and they're making headfakes in the opposite direction.

Note that this came AFTER the fall in NGDP in the first quarter of 2008. And note the rarity of this phenomenon: prior to this, quarterly NGDP had dropped exactly twice in the previous 57 years, in the 4th quarter of 1990 and the 1st quarter of 1982.

But in the summer of 2008, the Fed is still focusing like a laser on inflation.

Anyway, all told, the Fed cut ten times between September of 2007 and December 2008, when it arrived at the ZLB. By this time, of course, NGDP had cratered.

A little bit of Chuck Norris in late 2007 / early 2008 would have gone a long way. There was always gonna be a recession, but the Fed poured gasoline on the fire.

The errors are more obvious in retrospect. Today, the idea of a 5.25% short term interest rate... well, I don't expect to see THAT again in my lifetime.

What the Fed, and a lot of people, underestimated was the "new normal" in interest rates, due mostly to demographics, working its way through markets over a period of years. Their model of interest rate "normalization" was anchored a lot higher than reality. It still is, judging by the box plots the FOMC continues to publish. But they're getting there. Little by little.

+10, well said, both posts

Although I'm sure some posters here still believe it's all Obama's/Bush's/Reagan's fault

Given that money has been found to be largely neural, re-read your post Brian Donohue in this light. Your answer is like one given by a medieval priest without knowledge of bacteria explaining why there was a Black Death, along the lines of "the people had sinned and had to be punished". I guess it's OK to say what you know, if you don't know any better?


The "new normal" applies to REAL interest rates. It has nothing to do with money.

And this is pretty close to orthodox monetarism. Events like the Great Recession and Great Depression call for explanations. In a span of a year or so, 10 million people were working and then they weren't. WTF, right? The Great Vacation?

Hardcore Austrians are the real Puritans here. "We had it coming on account of our excesses " they paint on their sandwich boards. Think Andrew Mellon.

Keynesianism tell themselves fairy tales, as always.

Me, I'm a businessman. I understand ebb and flow, periods of stretching and periods of consolidation and, yes, shake-out. There is a germ of truth to Austrian Puritanism, but just a germ.

Monetarists advance a simple story: tight money plus sticky wages can turn a downturn into a catastrophe. It's happened twice in the 90 years.

There is some truth to this explanation.

This is Milton Friedman on the cause of The Great Depression.

I enjoyed the video and would like to see more like it. I find the practice questions especially helpful.

As a wild guess, this creative animation team uses something a bit fancier than a 4 dollar app. And expects to be paid accordingly for their work, just like inQbation was.

Where's your latest round of false equivalence between the Republican Party and the Democratic Party? I'm sure if you nutpick hard enough you can find some crazy Democrat out there who has talked about shooting a Republican presidential candidate. C'mon! Let's keep up the disgraceful and disgusting false equivalences! It really shows your quality as an "academic" rather than a partisan hack.

I will defend MR. I think they try to be not overtly political, but to use political news for teaching moments in economics. This may come across sometimes as a tin-ear to non-market moralities, but it's not like they are the only game in town. Plenty of the web is focused on non-market moralities.

Thomas Friedman for instance rolls comfortably from development economics to political morality. I won't even give the link.

I will take the bait. I was going to be an Obama voter in 2008 until he AND McCain suspended their campaigns to mutually champion the bailouts, claiming that the American people want them, that they need them... when polling had around 85% support AGAINST them.

The blatant lying and undemocratic meddling by both McCain and Obama is what turned me into a 3rd party voter.

All that being said, it's nice to not talk about the political parties for... at least a day? Can we go a day without thinking about our benevolent masters?

"The Big Short" was better.

MR needs more girls in bathtubs.

MR has Ray Lopez and his girlfriend half his age.

The movie had girls in Bathtubs? The book left that out--or at least I missed it. :-)

"The movie had girls in Bathtubs? The book left that out–or at least I missed it."

The movie also has a scene with a stripper with five mortgages, evidently she was making highly leveraged real estate investments.

It would be good if we had a system were that failure of one bank (or bank like organization) would tend to strengthen all other banks. A system that can provide safe assets to those seeking when they seek them in sufficient support. I think a banking system with privet money backed by only bank assets could be such a system. George Selgin's idea were banks print currency but the Fed government creates the base money might work. It that system Fed Gov. currency replaces gold but can be expanded if it needed. I think people have too much faith in the Federal Government assets like currency and so horde cash and T-bills when things go bad creating a fall in NGDP, which requires wages to fall.

Open Books management could help as could a UBI or hourly wage subsidy.


Indeed, although to be fair Alex was, like 99% of us, not expecting what was to come.

Is "was not expecting" the same as "could not imagine"? Because I would think he would have been able to imagine that making a lot of no-down loans to folks with low income could turn out badly. And if he could have imagined a bad outcome maybe he should have been a little more agnostic in his pronouncements.

Those were the days. MR hit the "credit snobs" horse pretty hard.

I think more of us would recognize today that lending requirements are a strength and not a weakness in a modern economy.

Very good video.

Your catalyst for the collapse - falling house prices - seems to come out of nowhere. Consumers were becoming nervous in 2006. Why? It doesn't seem like you really get to the root cause of the Recession.

Loaning money to broke and unemployed kids to buy houses they can't afford hit a wall when they started defaulting en mass.

Not an answer. Still leaves out why they started defaulting en masse. And excessive stories like this were outliers.

Since Fama won the debate, it sure can't be a "mania" in the Shiller sense. No animal spirits and bubbles, no sir.

Well done. Might also have noted that in the US mortgage debt is non-recourse to the borrower.

Big picture: the financial markets indulged in a speculative bubble (an inherent risk to capitalism that manifested for all the reasons enumerated by rayward @ 17), but this time we were spared a Great Depression. So...progress, right? In this light, why aren't Paulson/Geithner/etc...celebrated for their role in keeping the car on the cliff? Can anyone argue that this glass-half-full POV is patently ridiculous?

Because 'things worked out' doesn't sell papers or get you airtime. Plus how can we blame Obama or Bush that way?

Government and Federal Reserve policies created the bubble.

They don't get brownie points for printing $3+ trillion out of thin air to clean up the mess they made.

This is more about the financial crisis than about the recession. The recession is tacked on at the end, with little analysis.

A number of things were very misleading.

First, most of the mortgages at risk were not used to buy new, or even used, homes. Lehman in particular was making money on mortgage refinance - finding people who already owned a home with a mortgage, and paying off the existing loan with a new mortgage that added all the costs of the process plus the fees to Lehman execs and the fees to the mortgage originators plus the fees and costs to create and sell new securities.

A subset of the mortgages were to speculators buying real estate with high leverage to flip, or sometimes to rent. They might have seemed to have equity, but they spent the equity rehabbing to flip at high markup, or used the same real estate equity in multiple mortgages, ie properties on the market at high prices supported by market comparibles to establish equity "value".

Second, the word value is used to refer to price, while in the real world, value is based on labor costs and the benefit provided to the owner.

My house has not increased in value in the 30 years I have owned it. The price has gone up and down several times, with the house price equal to 75% of labor cost to 150% of labor costs at different times. The land price has gradually increased with inflation as I'm sure is the case with 90% of all land in the US - the value of most land never changes much.

Third, to say "we can't know whether the regulations will work" is to ignore history which demonstrates regulation can work, but that speculators who profit from prices swinging wildly from value come up with lots of free lunch economic promises to get rid of the regulations.

On the money market funds, the foundation of shadow banking and Lehman's credit, you parroted the claims made in the 60s and 70s for why retail money market funds would NEVER EVER BE CONSIDERED LIKE BANK ACCOUNTS.

I remember the gradual but rapid deregulation removing the boundary between money market funds and CDS, then savings, and eventually bank checking accounts. I remember "disintermediation" draining deposits from banks, starving banks and S&Ls of cash to lend in the late 70s and 80s. In the 80s, banks stopped making home mortgages except for premium customers. Their regulators, State and Federal, required mortgages be too high quality to be competitive. S&Ls had pretty much one line of business, but they were losing "savers" whose money they loaned to the same savers to buy homes to money market funds. They started selling securities with terms incompatible with mortgage terms. They failed in the 80s along with banks that had not stopped issuing mortgages. All the private mortgage insurers who insured the 20% of missing equity failed.

Thus, 50 years of regulated mortgage banking that turned into unregulated mortgage banking crashed in about a decade. And the first TARP was passed by Congress. Rather than reverse the deregulation, the "solution" was more deregulation and more promises that investors would not watch lenders like a hawk and never let them do what happened from 2003 to 2007 when all the brakes were removed by State regulators and justice oversight was preempted and given to the Fed and Alan Greenspan who argued fraud is impossible in a free market like he oversaw and created with unregulated bankers creating debt and selling it in securities markets.

I was slightly surprised by the mortgage crisis that started while Reagan was president, but totally unsurprisingly in 2008.

I just never knew anyone who could tell me how to get rich from the failure that was certain. Instead, I just hunkered down expecting a rerun of 1987-8 to 2005. 2007-8 to 2015 is pretty much a rerun except regulations were taken back to something like 1975 to 1985.

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