the big application of the a great demand a great supply model is to model the Great Recession of 2007 to 2009 and what the government did to respond to it um you know this is a major major event and basically like the last century hopefully the biggest event in our lifetime and we don't have to experience another one of these but 2008 2009 was a very very severe recession um the worst recession in America has had since when only Great Depression is worse right um and just get a sense of how bad it was you know unemployment right before the Great Recession was 4% it more than doubled all the way up to 10% um in the depths of the Great Recession um so we're talking like more than doubling of the unemployment rate I told you like the young person that's unemployment rate went all the way up to like what like 20 25 percent right so there's a very terrible event for us um so what was supposed a trigger for this well a few years before the Great Recession we actually had the opposite a great boom in the housing market and what was causing this great boom in the housing market low interest rates cheaper for people to borrow people go forward bigger and nicer homes and certain developments in the mortgage market made it so that it's easier to get a mortgage and therefore easier to buy a house what are these specifics and we'll go through these specifics um low interest rates easy credit for who are called subprime borrowers so subprime means you know prime borrowers somebody that has really good credit history has like you know proof of income has assets subprime is somebody that's below that prime so maybe not the best credit not the best income [Music] seems to allow these people to still be able to buy a house and then finally there is this widespread use of what's called securitization of mortgages so what what happened is investment banks would purchase mortgages from regular commercial banks securities that are backed by those mortgages and then sell those securities to lots of different types of investors and these type of securitization were perceived as safe just to illustrate what it means like take a look at this what a sweater securitization name so you know think about what um the way that you traditionally think about how you borrow money to buy a house is not the way that it actually works you know where do you where do you think you get your mortgage from or where do you get your mortgage from yeah bank like you go to Wells Fargo Bank of America or some random lender um and so you know you think of it as like you know here's here's the bank here's a little vault right here's B of a there's Wells Fargo whoever Citibank you name it um and you think of it as like you know they send you money and then you take that money and buy the house and in return you now have a mortgage so that essentially means you owe B of a this money okay so that's how people think it happens but that's not actually how it happens what happens is you know BV still does this you know they give you they initially lend you the money you give them a mortgage you then go buy the house but then through the securitization process what B of a does is they take your mortgage and then put it into a pool and they don't do that just for just one mortgage but what do you think they do like lots and lots of mortgages right so they take not just your mortgage but the mortgages of somebody else somebody else somebody else somebody else and they create a really really big pool of all these mortgages investment banks one of their their functions during this time was to create these pools and then what would they do with the pool then is very similar to what we do with mutual funds what do you think they do they don't lend it they just they don't lend it out but they sell it they sell like little portions of it so they sell these portions of it to lots and lots of people who we call investors so when you're an investor buying this mortgage-backed security what are you buying then your rights to their house and their and basically all the payments that the person makes for that mortgage it goes into the pool then goes to the investors so if you're an investor you're essentially buying those those those stream of payments from that from that mortgage borrower okay you kind of see that now what's the advantage of this type of system if you think about it yeah yeah and it allows it allows like the entire system to take advantage of what this is exactly the same as a mutual fund what does a mutual fund give you think about it right with for you to do by yourself especially with just like $1,000 or $10,000 it's hard for you to take that $10,000 and then buy like lots of different stocks right you know because some some stocks cost like $500 some cost like thousand dollars like if you had ten thousand dollars there's no way you don't have enough money to diversify to spread it out but what a mutual fund does is remember a mutual fund takes everybody's money into one big pool and then allows you to then split up that pool with any amount of money so like even a hundred dollars can be split up a thousand ten thousand different ways um your money gets diversified instantly same thing happens with the mortgage pool but like think about what's the downside of this set of system if it's the bank that loans you the money and they're the ones that hold the mortgage what are the bit what's the bank vulnerable to if you if you default on your mortgage who takes the loss the bank does right and think about like Wells Fargo or B of a or any regional bank they're typically lending to their particular region and so what are they then vulnerable to like think about the bay area what woods bear is super vulnerable to what could happen that would just destroy the housing market and it could happen any day could happen like right now an earthquake could happen like we're sitting on multiple fault lines right all it takes is one huge one and what's gonna happen houses are gonna collapse nobody's gonna want to live here any more people are gonna die and the housing market will immediately crash okay what that happens to be of a Wells Fargo the ones that have been lending for the Bay Area they're gonna take massive losses on these mortgages because these people will be unable to pay back you're not gonna you're not gonna pay a mortgage on a house that's destroyed or it's been shifted off its foundation or it's worth half as much you'll just walk away from it and default and B of a is stuck with it what's the advantage of this system B of a now doesn't have to hold your mortgage instead sells it off to a big pool and then what happens to that risk that risk is then diversify spread out to a whole bunch of different investors and those investors when they when they invest they don't have to just invest in the Bay Area real estate market by buying into the pool what do they get to do they can buy houses like basically small portions of houses everywhere and so you get massive diversification does that make sense like the creation of pool like allows easy diversification the problem though is that there is a belief that because housing prices had never fallen over the last 50 years before this event nationwide like individual regions would go up and down but the overall housing market would never has never gone down in 50 years so there is a belief that housing would never ever go down at least nationwide over 50 years so that means that as long as you're diversified you're spread across all the regions of America these are then perceived to be safe investments it's not safe if you just invest only in one region like the bay area or let's say like Louisiana which is like you know like New Orleans which is vulnerable to like you know hurricanes or Florida is home vulnerable to hurricanes or the Midwest that's vulnerable to tornadoes or California is vulnerable to earthquakes but as long as you're spread across all the different regions then you don't have to worry because if a natural disaster hits in one place it's not gonna hit every single region the other regions will do well while the one that gets hit suffers and so this is the principle of diversification right but then there's a belief then that these pools were safe because as long as you're diversified then they would never lose their value so what do you think investors started doing it's really safe they're gonna they're gonna buy lots of these securities so there's a whole bunch of money like these pools became very very popular people wanted to invest in them and that didn't encourages B of a and all the banks to do what to give more money into the pools right and the thing is they think about the incentives of the bank here in this model you have to be very careful who you lend to because if these guys default who takes the loss the bank does right in this model though if the lender makes a bad mortgage and the person doesn't pay it back who suffers it's these guys not these guys so what do you think these guys are gonna do with it what's the bank gonna do make lots and lots of mortgages because they know they're just gonna pass on the risks to somebody else and they make their money from just creating really a gigantic pools so that's what loosen the lending standards or one of the reasons why the lending standards are loosened and like during this time is ridiculous like you know at the very extreme like the super subprime lenders this doesn't happen all the time but it was an example of like how easy it was gonna loan there are what are called you could get what's called a ninja loan okay so ninja an acronym right guess it in just stands for his awesome it's not that's not the official term but this is essentially what a surprise one is like a ninja stands for no no income okay that's ni what does MJ stand for no job okay the a there's not an N in front of it but a stance or something is an a it's no assets okay so you have no source of income you have no job you have no assets so you have no savings no problem we'll lend you the money as long as you're buying a house housing prices have never gone down we don't care we'll give you the money it was ridiculous like I'll show you like I actually got a I got a loan for buying my house around that time and you know I actually have income in a job and assets but stuff like that but I did remember like the lending process was ridiculous like the lending process is like okay so how much money do you make fill it out in the application and that's it like okay right write down how much money you make so what can you do yeah you can write anything like write down how much savings you have okay I try to tell like yeah and you have to sign it but like nobody's nobody's verifying because you think about it like from the PERT from the lenders perspective the risk is gonna get sent down to somebody else the other perspective is if housing prices don't go down you can lend to somebody even if they can't afford that house because let's say that they lose their job and can't pay the mortgage anymore as long as house prices are going up what can they always do they could always sell it and if they can sell it for at least the same amount that they bought it for what can they do for the mortgage then they can just pay it right right off no problem and even better if the house prices are going up then if you can't afford to pay your mortgage no big deal you'll sell and then make some money off of that thing and so you know no big deal to make these type of loans when housing prices are not going down when housing prices are going up big deal though when housing prices are going down because if you can't afford the mortgage what will you do then well you can't you won't sell for a loss you don't want to take that loss so you'll just just walk away from the mortgage okay screw it I don't care I'm not gonna pay the mortgage I'm gonna default and then who's stuck with it the bank but not really the bank the investors that invested in it now that's what that's what happens during a foreclosure um so you can see this idea of securitization then increase the amount of risk that banks are willing to take on um it does have like a theoretical advantage like of diversification and the securitization actually happens for everything your student loans are securitized car loans are securitized credit card debt is securitized um it's a way to diversify but for the housing market it was done like at an extreme level this encouraged you know ridiculous practices like these ninja loans um so what happened then because of easy credit huge increase in housing demand and a belief that a house was like the greatest investment would never lose money this is going to lead to massive increases in housing prices which more than doubled over a very short period of time but of course what's happening is a bubble as being formed and a bubble is like when you buy something you buy some type of investment or asset not because you think it's actually worth that money but because what why why would you buy something even if you didn't think it was worth a hundred dollars why would you buy something for a hundred dollars if you didn't think it was worth a hundred dollars if you think we'll buy it for a hundred and ten dollars even though you know that it's only worth a hundred okay got you guys good get this like you'll you'll sell you'll buy something all at a price that doesn't make sense if you think somebody else will buy it at a price that's even greater than what you think you know is sort of ridiculous but then you can kind of see that what happens logically then what does that person do why is he buying it for a hundred and ten because he thinks that somebody will buy it for a hundred and twenty and then that's when prices just become ridiculous right that's that's what's called a bubble and all bubbles must eventually do what they're gonna they're gonna pop when somebody realizes oh my gosh the thing is now like it's like it's gone up at $300 but really it's only worth a hundred lets stop nobody else is out there to buy so it's price collapses these bubbles have happened in lots of times in history like the famous one is like you guys know about the Dutch tulip bulb bubble it's a famous famous bubble it's a famous example of like something that people just started buying only because they thought somebody else was willing to buy it at a higher price not because it was worth something okay so it's it's called a Dutch tulip bulb bubble because what were people buying to our bulbs right and then we're literally buying tulip bulbs we're buying like contracts to buy future tulip bulbs but what is a tulip worth like what's it what's its fundamental about value for a tulip like what's a what's a flower worth huh yeah like it like maybe five ten twenty dollars right like you know because they're pretty you can give it on Mother's Day you can give it on Valentine's Day they make people happy you know it's nice right there they have some fundamental value but that fundamental value is like ten or twenty dollars right especially for tulips right what happened with tulip bulbs is it became really fashionable in the Netherlands at the time for people to have two lobes and this happened like the 15th century that people started buying them and the price went from $10 to $50 and then it went for $50 to $100 people that people that bought it at 50 could now sell for a hundred and so what is it what are they thinking hey this is awesome like I just doubled my money in like a month like selling these tulips I know they're only worth like $10 right but if I can buy it for 50 and sell for 100 well what else can I do buy it for 100 and sell it to somebody else for 200 and now the bulb price has gone from ten dollars all the way up to two hundred dollars what do you think starts happening around the entire country these starts everybody's start seeing that holy cow I just buy like a thousand to it bulbs I can turn you know ten thousand dollars into like two hundred thousand dollars within just a few months so what do you think everybody starts doing tulip bulbs right and I and I've adjusted these prices to convert to um you know current day prices you know obviously it's in Florence or whatever back then but literally this is what happened the price went from fifty you know ten to fifty fifty to a hundred hundred to two hundred two hundred five hundred five hundred to a thousand so now we're talking a thousand dollars for tulip bulbs and it just kept on going a thousand of ten thousand and then what was the peak price in which it finally people realize holy crap like we're just buying stupid flowers the price of a tulip bulb and in a very special one there's a certain one that people wanted when all the way up to the price of a house like the the equivalent price of a house we're talking like two hundred thousands like a hundred thousand dollars in the current day for a flower for a flower so what do you think happen at that point yeah well they're like holy crap like what why are you buying these stupid flowers when I could buy a house which actually gives me like housing it's like something that's real that's when they realize holy crap it's just a flower what do you think happened then price like crashed like crashed and anybody that bought tulip bulbs at fifty thousand syphilis seventy thousand a hundred thousand all suffered massive massive losses because at the end of the day it's just a flower right um and these bubbles have happened all throughout history like the stock market had a bubble with the dot-com that caused like a 50% loss Great Depression was the same thing that was like ninety percent loss um but these bubbles happen periodically and this housing one was a huge huge bubble if you're buying a house just because you think you can sell it for more later not because you actually want to live in it and it's worth something to you then a bubble is gonna start forming people will start buying it but eventually they're gonna realize this house really isn't worth like a million dollars or two million dollars it's really worth like five hundred thousand dollars and the price is gonna drop um these bubbles are called like the greater fool theory why do you think it's called a greater fool theory yeah well you're you know that you're foolish to buy like a tulip bulb for a thousand dollars literally it's a flower for a thousand dollars but you think that there is a greater fool out there who will give you ten thousand dollars for it and then he thinks that there's a greater fool that'll give them a hundred thousand dollars for it so that's that's when bubbles form and obviously bubbles will eventually crash as they did in our 2006 after 2006 housing prices fell by thirty percent math of amounts of defaults and foreclosures people had to leave their houses because it wasn't worth it for them to pay a mortgage for a house that was worth like half as much as they they bought it for all and then massive losses and all the financial institutions that have these securities all these investors suffer huge huge losses and just to get a sense of what it looked like you know this is a measure of overall housing prices in the country you can see starting in 2000 and really in the 1990s there is a massive increase in prices this is just exactly like the tulip bulbs maybe a you know less of an extreme but people are buying because they can think they can sell with somebody else at a higher price that encourages more people to buy more people who buy more people who buy until people can't afford to buy anymore in an all sudden this massive decline massive decline um so what happened of homeowners became underwater which means that their mortgage was greater than what the house was actually worth cause people to just walk away in default banks were then stuck with these houses and so what do they what do they gonna have to do with these houses so yeah sell them for a lower price but then banks are forced to sell a lot of sell a whole bunch of these houses so what's gonna happen the price of houses they're gonna go down which is gonna cause even more people to then become foreclosed upon to walk away and get and default um and construction was was heavily damaged during this time yeah it just hurts your credit but your credit your credit can be expunged in seven years so you don't suffer really bad credit for something like you it'll be a heart very very difficult for you to get another mortgage to get another credit card to get a car loan but that's the only consequence there is no besides the money that you put for a down payment that's the only loss that you'll take and many people will think that that's better than losing all that money like like honey because it can be hundreds of thousands of dollars they'd rather just take the hit to their credit rather than take that actual money to monetary loss um so massive decline in solvency and financial institutions massive decline they're starting to be like sort of runs on banks because people thought that the banks were going to not have their money so I remember I told you guys like IndyMac Bank and a few banks just completely collapsed during this time countrywide Washington Mutual these are all large financial institutions that had to close down during this time and it created what's called a credit crunch it was very hard for people to borrow money during this time because people were worried that they're going to out you're gonna be unable to pay it back this caused massive decline in investment massive increase in unemployment massive decline in the stock market um sort of a vicious circle just making this whole thing get worse and worse and worse yeah well the problem is that nobody knows when a bubble was happening right I mean if I had to guess I would guess bury a real estate like for sure I'll not nationwide real estate because the nation hasn't gone up as crazily but like I mean that now we've exceeded even the prices seen in 2006 and 2007 now what's the argument against it the argument against it is well the the economy is doing really well like there's a lot of tech money people are if you're lucky enough to work in a company good IPO do you all of a sudden get millions of dollars then go out and buy a house and as long as that continues that there will be enough money to keep on buying the houses the argument against it is how high can these prices go hike you know somebody has to buy that house for cheating you bought a house for 2 million like a 2000 square-foot house like who's gonna buy it for 3 million who's gonna buy it for 4 million like is the economy to keep on going like it's just kid as soon as soon as the tech industry collapses or if there's if there's a bubble there which is again like you know possible then the housing market will also go down and I believe the biggest thing as an earthquake like we're all undervaluing under estimating like the likelihood of a major earthquake because we haven't had one in so many decades that work very very complacent about it like cuz you know we were on nearsighted like we okay well if it hasn't happened last year it's not gonna happen next year but that's foolish right some point it's gonna happen and if it does if your house collapses well then it's you know even now it's only worth the only land is where something and then people aren't gonna want to live here if they don't want to live here then housing prices will go down like significantly um Tech is another possible bubble you know are these do these companies really justify these massive valuations maybe maybe not but the problem is again we can't when we're in these bubbles it's hard to know that you're actually in it even during that housing market rise you know obviously with hindsight you know like taking a look at this data here with hindsight clearly there's a bubble forming right because this is massive increase but there are lots of people saying that there's a bubble like here there are people saying that there's a bubble here there are people saying that there's a bubble here and all times proven wrong it's just when do you know the peak is gonna happen nobody knows only with hindsight like and the ones that can guess can make themselves fabulously wealthy but though the general consensus though doesn't know when it's gonna happen it's only obvious after the fact even the tulle bulbs like we laugh at it now like you're like it's ridiculous but think at the time like your neighbor just bought a bulb for a thousand dollars and then sold it the next week or next month for two thousand dollars and that's real money being gained what's that gonna make you want to do buy it for two thousand and like sell it for three thousand like and then you and you'll do it and it'll actually happen and then everybody will start doing it but then at some point there's no greater fools and that's when it goes down yeah there's a possibility that there's a bubble there but it but you know that's backed by your future earnings so as long as you're gonna get a good job which as long as the economy is doing well you'll be able to pay back that loan um now if you walk away from that loan and a lot of lots of students walk away from that loan then the bubble will pop or that those value those student loans will go down but that causes very significant damage to you like nope bad credit for seven years is like very very damaging you'll be unable to buy a house on a little bike you know get a car loan the interest rates that they charge you will be like ridiculously high well until you pay it back like you can pay it back whenever you want to just you have to make enough money to pay it back you can use declare banker default on it as well but you have to our bankruptcy to do so and like I said there's a consequence to that um yeah I that's look like to you how almost 20,000 but a lot of people believe that bitcoin is a bubble um and even think that right now it's still a bubble like because it's still trading for like thousands of dollars because remember what's Bitcoin backed by essentially nothing like so really it could be worth nothing so anyways so yeah the credit crunch massive vicious circle uh mortgage-backed securities became toxic nobody wanted to hold them massive increases unemployment collapse of the investment banks Bear Stearns and Lehman Brothers which sort of triggered this whole the whole event and so the way that we model it is this is like a massive decline in a great demand shift to the left of a great demand and if you think of it in our a grammarian supply model if a Goethe man goes to the left what's gonna happen to everything prices are gonna go and think about think about demand think about it like just think about logically do you think of the model if less people are buying what's gonna have to happen prices you have to go down so inflation is gonna go down right what's gonna happen to unemployment or what's go up into GDP massively decline and if GDP goes down then unemployment must go up great and that's that's how we model it right massive decline in GDP if aggregate demand shifts to the left uhm you know that four point two percent if you think about four point two percent it may not sound like that much but what's that off of you know our 20 trillion dollar economy select 4% is like almost a trillion dollars lost and if a trillion dollars of economic Tiffany is gone then unemployment is gonna skyrocket so we know what is the Keynesian response to this which what should we do or what had to be done well how do you fix it how do you fix it like what's what's the what's the answer you should have an increase in government spending a decrease in taxes that would be called stimulus in economics we call it expansionary fiscal policy right um what would the Federal Reserve do expansion Airy monetary policy so start printing money like crazy and remember during this time as a financial crisis there is panic for the bank's so what did the government also do there are three three actions that they did one was the stimulus that's fiscal expansion area fiscal policy number two the Fed printed a lot of money sense expansionary monetary policy the third thing though is stop runs on banks what did we do to those banks Tamara what do we call it quantitative using missive printing of money but we do for those banks because they're gonna they're gonna start going under people were panicking do you remember what he called it what was its traditional colloquial name it was called a tarp Troubled Asset Relief Program but it's named throughout the country was called the bailout bailout so like many Wall Street institutions and banks essentially got money from the government to keep them afloat all very very unpopular but very very necessary for saving the overall economy so what were the actions here Federal Reserve right drop the interest rate all the way down to zero to try to stimulate the economy um they started doing quantitative easing they started buying these mortgage-backed securities that nobody wanted to hold anymore to try to support that market you this thing is going to provide banks with the money they need to make let to make loans so that was expansionary monetary policy that occurred the downside of this is the feds gonna print like four trillion dollars worth of money so what were people saying during that time you know print all that money it's gonna lead to like massive inflation even more like oh my gosh we're gonna have hyperinflation did we ever get hyperinflation we even get any inflation no they're all proven wrong um now maybe we'll get inflation later on but still yeah no signs of inflation ever you remember currents all these other different things like but it was done with a purpose and inflation never happened next thing Congress took 700 billion dollars to bail out the banks um make it easier for loans to happen lend money banks so that they wouldn't go under and again this is very very controversial during the time because when it would how did how do you think the average person viewed this yeah we're just giving all these Bank to Mike we're giving Wall Street all this money and why should we give all that Wall Street all this money but you should remember this money was not given to them but what was it done for them it was lent to them it was a loan to them not free money so if any type of loan what has to happen they had to pay it back and what's interesting is that they ended up they did pay it back and they paid it back with interest so the government actually made money off of many of the loans that they made to Wall Street during this time but this was hugely controversial during the time this is when like Occupy Wall Street became really really big they're like well why is Wall Street getting all this money from the government there's like it's all cronyism it's all they're lobbying like they control the government there's all this hatred because what what does the average person want they want that money instead they want it they want their they're like where's my bailout why does Wall Street get the bailout but what they're not understanding is that Wall Street has a very important purpose right the entire financial institution that's important for lending and multiplying money without them that doesn't happen and the person wants what from the government they don't want loans from the government they don't want to borrow money from the government they'd rather have just free money okay but this was not free money into the banks these are loans has to be paid back finally 30 yeah I think there's like some of them some of the things that they lost off of a part of tarp went to the auto companies as well which is a little bit lame but um that was more of a political thing um I think that money was lost like maybe a hundred hundred billion there but all the money went to Wall Street almost all of it was paid back and paid back with interest so I think they made like a hundred billion or so I don't know the exact number but they definitely made money off of these programs and again the average person doesn't think about that the average person like all its Occupy Wall Street like why did they get all this money for free why are taxpayer money going to save them they didn't understand that these are actually loans and then Wall Street paid it back and paid it back with interest and it was for a purpose if these banks were allowed to fail what do you think would happen there'd be bank runs like crazy actually at the time like you know most of the banks that failed were relatively small banks but we learned later on that Citibank was actually vulnerable to going down and think about how big Citibank is Citibank is everywhere like they're huge huge institution if Citibank were to fail would that make people think nobody's safe like Wells Fargo is gonna go down B of a is gonna go down and then there'd be like huge runs on the bank this tarp and the bailout prevented those runs from happening finally last thing Obama passed the stimulus package massive increase in government spending decrease in taxes close to eight hundred billion dollars three of these actions started the recovery so between 2000 2009 massive decline in GDP then a small recovery started occurring you today with a fully recovered economy at this point you you okay all three of these programs were usually controversial like so the bailout you know people like white as well as you're getting bailout was a stimulus package really unpopular or controversial so what's gonna happen to debt it's gonna like massively increase right so like oh my gosh like the US government's gonna be unable to borrow money but so far at least no crisis has happened it's gonna eventually happen but during that time it was predicted that oh this is gonna be terrible like our debts gonna like double and it has doubled but nothing terrible has happened if anything everything's actually recovered now um so all these things were hugely successful like you know for most economists American Recovery and Reinvestment Act was a stimulus Act all wasn't successful at reducing unemployment it's like 97% agreement um well the benefits in the steamy exceeding its costs 75 percent agreement submitted much agreement that these programs were good at getting us out of the Great Recession okay any questions okay so moving on so this is the last chapter and the last step is pretty cool we introduced an application of the aggregate demand aggregate supply model something called the Phillips curve and then from it we get to learn the entire history and development of this a great demand I read supply model and the Phillips curve and it gives us an idea of like how the economist came up with these ideas and what mistake