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[MUSIC]
So we've been using several terms, and you'll hear several terms getting used,
sometimes interchangeably.
The housing crisis.
The financial crisis.
The foreclosure crisis.
The Great Recession.
All of these different terms mean slightly different things.
And if we were going to be more precise, which sometime we will need to be.
We should say the following,
which is that the housing crisis is a primary driver of the financial crisis.
They're not identical things.
One can have a housing crisis without a financial crisis.
And one can have a financial crisis without a housing crisis.
In the United States, these things corresponded.
They did not correspond in every country in the world, many of which had financial
crises, but as we have seen already did not have housing crises.
Similarly, it would be possible to have a housing and
foreclosure crisis without it infecting the entire financial system.
So we say housing crisis, really mean exactly what was going on in housing.
Which is, housing prices fell dramatically, and
there was a lot of foreclosure.
So, foreclosure crisis, that would be a synonym for housing crisis.
The financial crisis, that's the whole thing that we've been talking about that
happened to the financial system.
With the failure of financial institutions,
the seizing up of financial markets.
The financial crisis and the housing crisis together
contributed significantly to what is now called the Great Recession.
So, that's real economic activity.
A falling in the real economic activity, people losing their jobs.
Falling house prices had a very large effect on that independently.
The collapse of different parts of the financial system
had an effect on that independently.
You can have a recession without a housing crisis or a financial crisis.
But in this particular case,
the recession became what we call the Great Recession, in large part,
because it coincided with the housing crisis and the financial crisis.
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Now, to really understand how it is that these things are related,
why it is that the housing crisis is a primary driver of the financial crisis,
we need to look at another side of what was going on.
Today we've talked a lot about the loans themselves, and the borrowers, and
the foreclosure that happened on those borrowers.
But we have to understand why there was such a growth.
Particularly in subprime loans.
What was driving that?
Where was the demand side for the loans?
For owning the loans, for putting those loans on your balance sheet, or
for bundling them up?
So we will do that.
And over the next few modules,
we'll develop the connections between the housing sector and the financial sector.
And show why really it was necessary that these pieces be moving together that
actually led to the Great Recession.
[MUSIC]
Andrew MetrickMichael H. Jordan Professor of Finance and Management
Timothy GeithnerLecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury
