503-785-3485
bill@conerlyconsulting.com
  • Facebook
  • Twitter
  • Linkedin
Conerly Consulting Conerly Consulting
  • Consulting
    • Approach/Philosophy
    • Sounding Board
    • Economics and Business Strategy
    • Assessment
    • Case Studies
    • Testimonials
  • Speaking
    • The Package
    • Topics
    • Testimonials
  • Writing
    • Businomics Newsletter
    • Businomics
    • The Flexible Stance
    • Blog
  • Industries
    • Banking/Finance
    • Manufacturing
    • Other Industries
  • Video
    • Speaking
    • Event Promotion
    • Business Planning
  • About
    • News Coverage
  • Contact
  • Consulting
    • Approach/Philosophy
    • Sounding Board
    • Economics and Business Strategy
    • Assessment
    • Case Studies
    • Testimonials
  • Speaking
    • The Package
    • Topics
    • Testimonials
  • Writing
    • Businomics Newsletter
    • Businomics
    • The Flexible Stance
    • Blog
  • Industries
    • Banking/Finance
    • Manufacturing
    • Other Industries
  • Video
    • Speaking
    • Event Promotion
    • Business Planning
  • About
    • News Coverage
  • Contact
  • Home
  • Economy
  • Why Did the Mortgage Crisis Happen, Part 2

Economy

08 May 2008

Why Did the Mortgage Crisis Happen, Part 2

  • By Bill Conerly
  • In Economy
  • 1 comment

Yesterday I posed the question of why the mortgage mess happened, and why at the time that it did.  There were two fundamental building blocks of the crisis: the Great Moderation and Securitization.  The aftermath of the 2001 recession provided the trigger for the mortgage mess.  In this post, I explain the role of The Great Moderation.

The
Great Moderation is the new world of macroeconomic cycles that began in
1983. In the United States and around
the world, recessions became milder and less frequent. (There’s a great interview with Mark Thoma
about this topic in the Businomics Audio Magazine.)  The chart of rolling 20-quarter standard deviation of real GDP changes illustrates the calming of the economy:

Gdp_std_dev

 

Back in
1983, a business executive with 25 years of experience would have experienced
five full business cycles. Today, an
executive with a quarter-century of experience has only gone through two full
cycles. We are less experienced in
dealing with recessions because of the Great Moderation.

The
Great Moderation by itself lowered fears of recession, but the nature of the
most recent recession (not counting the current cycle) also reduced concerns
about a possible downturn in housing values. The 2001 recession was triggered
by a decline in business capital spending, especially in high tech and
communications. Housing suffered
relatively little; it was the mildest housing cycle of the postwar recessions.

As a
result of the Great Moderation and the strength of housing in the 2001
recession, the housing sector appeared to be recession-proof.
 This was a mistake, and those of us who like
to examine long data series knew it, but financial types prefer to look at
recent data. When I attended my first
Credit Policy Committee meeting as a bank economist, back in 1988, the
experienced lenders priced consumer loans based on a five-year average loss
rate. I was thunderstruck! The
five-year period did not go far enough back to include a recession. In fact, credit policy coming out of a
severe recession tends to be tight, so we were probably looking at abnormally
good credit history. This is the kind
of stuff that financial people should do a better job at.

Next:
the role of securitization in the mortgage mess.

  • Share:
Bill Conerly

    Comments

  1. Mike Lion
    May 9, 2008

    Please discuss the role of the Community Reinvestment Act as renewed in 1995 (First passed in 1978, I believe).
    This Act forced lower standards for borrowers on banks, and led to things like no-documentation loans and no-down payment loans. Banks that dis not comply were threatened with disapproval of merger plans or plans for new branches.

Comments are closed.

Search

Sign Up For Our Newsletter!

View Latest Issue

RSS Bill’s Forbes Articles

  • Inflation Has Not Shown Up Yet, But It’s Coming February 25, 2021
    Inflation is muted, but not for long. Inflation is coming in the next two years, then will be followed by a boom/bust business cycle, or maybe two.

Testimonials

Bill is a delight and easy to work with. The client thought he was great and delivered value to their group. I would definitely recommend Bill.
Andrea Gold, Gold Stars Speakers Bureau
Bill was a great resource in helping us develop our business model and has continued to be a great advisor as we have refined it and successfully entered the marketplace.
John Courtney, CEO, NextJob, Inc.
You are a master at your craft and a favorite of our audience.
Jim Parker, UBS Financial Services
Dr. Conerly’s presentation and view of the economic conditions impacting the world of business is insightful and thought-provoking. His analysis and presentation style is audience focused and engaging, leading to the efficient development of follow-up activities by those in attendance.
Paul Ulrich, The Inteplast Group (plastic bags)
Your talk and its message stuck with people.
David Crowell, after presentation to National Rural Electrical Cooperative Association
You made a complicated global picture understandable. I have received many favorable comments from those in attendance. I frequently heard comments like ‘Now I understand’ or ‘Wow, now I get it’ and ‘He was great to listen to. Thanks for bringing Bill to our meeting.’
Pete Van Sickle, Idaho Department of Lands
Bill’s presentation was neatly balanced…rich with content.. and our audience really enjoyed his humor.
Bing Sheldon, SERA Architects
Bill did a great job. We look forward to a continuing relationship.
John Hamburger, Franchise Times
As you know, it can be difficult to find economists who provide good substantive information who are so entertaining and engaging. I received many enthusiastic comments from members and others in attendance. I was very pleased with Dr. Conerly and have recommended him to NCSTAE, our national organization.
Molly Steckel, Idaho Telecom Alliance
On multiple occasions we have engaged Dr. Conerly to facilitate, and more importantly, stimulate strategic planning sessions. He artfully brings the complexity of economic consequences to light, and is also is a veteran voice of objectivity. And his ability to inject humor keeps the energy and teamwork a priority!
Greg Newton, CFO, Cascade Bancorp

Get in touch

(503) 785-3485

bill@conerlyconsulting.com

PO Box 2188
Lake Oswego, OR 97035

Useful Links

  • Consulting
  • Speaking
  • Videos
  • Blog
  • Press
  • Contact

Social Links

  • Facebook
  • Twitter
  • Linkedin

Newsletters

Copyright 2020 Conerly Consulting LLC