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however, the numbers became a disaster. Overleveraged American families found that they could not afford their mortgage payments, nor could they sell their homes. Millions of houses and condos were thrown into foreclosure by whatever bank or financial institution owned the mortgage. When these properties were dumped on the market, it drove prices down further and exacerbated all the real estate–induced problems.

But we haven’t even arrived at the scary part yet. America’s mortgage problem spread to the financial sector through two related channels. First, banks were plagued with lots of bad real estate loans, which made them less able and willing to make new loans. Anyone looking to buy a home had trouble doing so, even with good credit and a large down payment. (You guessed it: This compounded the real estate problems yet again.) Meanwhile, Wall Street investment banks and hedge funds had loaded up on real estate derivatives—fancy products like mortgage-backed securities whose value was somehow tied to the plunging real estate market. Like American homeowners, these institutions had borrowed heavily to make such investments, so they too faced creditors. Much of this debt was “insured” with the credit default swaps described in Chapter 7, wreaking havoc on firms with that exposure.

There was a stretch of time in the fall of 2008 when it looked like Wall Street—and therefore the global financial system—would implode. The most serious moment came when the investment bank Lehman Brothers recognized that it could not meet its short-term debt obligations—meaning that without some infusion of outside capital, the firm would have to declare bankruptcy. The U.S. Treasury and the Federal Reserve were unable, or unwilling, to save Lehman. (Earlier in the year they had saved Bear Stearns, another troubled investment bank, by arranging a takeover by JPMorgan Chase.) When Lehman declared bankruptcy, leaving all of its creditors high and dry, the global financial system essentially seized up. A Treasury official described the cascade of panic to The New Yorker: “Lehman Brothers begat the Reserve collapse [a money-market fund], which begat the money-market run, so the money-market funds wouldn’t buy commercial paper [short-term loans to corporations like GE]. The commercial-paper market was on the brink of destruction. At this point, the banking system stops functioning.”12

Sensible people started talking about surviving by raising goats in the backyard. (Okay, that was me.) My college roommate, who has gone on to become the CEO of a major company, admitted later that he had hidden $10,000 in a cowboy boot in his closet. (I was left wondering primarily why he owns cowboy boots.) We were not alone. James Stewart has described the Lehman collapse and all its attendant damage in a brilliant piece for The New Yorker. Here is one sample:

Geithner [then president of the Federal Reserve Bank of New York] said, “It’s hard to describe how bad it was and how bad it felt.” He got a call from a “titan of the financial system,” who said he was worried but he was doing fine. His voice was quavering. After hanging up, Geithner immediately called the man back. “Don’t call anyone else,” Geithner said. “If anyone hears your voice, you’ll scare the shit out of them.”

You don’t have to like investment bankers to care about all of this (and to appreciate why the federal government needed to stop the panic on Wall Street). Once the financial system seizes up, no one gets credit. At that point, healthy companies become less healthy because they don’t have access to loans that allow them to do things that are necessary for business, such as buying inventory. The damage of the financial crisis spread to every corner of American society. In 2009, pre-order sales for Girl Scout cookies plunged 19 percent from the year before.13 Meanwhile, the number of adult films produced in Southern California fell from five or six thousand films a year to three or four thousand. The Economist reported on the macroeconomic effects of less porn: “Some firms have shut down, others are consolidating or scraping by. For the 1,200 active performers in the [San Fernando] Valley this means less action and more hardship…For every performer, there are several people in support, from sound-tech to catering and (yes) wardrobe, says Ms. Duke [a spokesperson for the adult film industry], so the overall effect on the Valley economy is large.”14

Recessions can spread quickly across international borders. If the U.S. economy weakens, then we buy fewer goods from abroad. Pretty soon Mexico, which sends more than 80 percent of its exports to the United States, is reeling. In business as in sports, your competitor’s misfortune is your gain. At the global level, the opposite is true. If other powerful economies fall into recession, they stop buying our goods and services—and vice versa. Think about it: If unemployment doubles in Japan or Germany, how exactly is that going to make you better off? During the financial crisis, the problems on Wall Street quickly spread to other countries. Americans—who are collectively the biggest consumers in the world—bought fewer imported goods, which harmed exporting economies around the globe. America’s GDP contracted at an annual rate of 5.4 percent in the fourth quarter of 2008. You thought we had it bad? Singapore’s economy fell in the same quarter at an annual rate of 16 percent, and Japan’s by 12 percent.15

How do things get better? There are often underlying issues that need to work themselves out. In the case of the “tech wreck,” we massively overinvested in Internet businesses and related technology. Some firms went bust; other firms cut back their IT spending. Resources were reallocated, at which point there were more U-Hauls going out of Silicon Valley than in. Or, in the case of higher energy prices, we reorganize our economy to deal with a world in which oil is $100 a barrel instead of $10. In the run-up to the financial crisis, consumers and firms borrowed too much; speculators built houses that never should have been built; Wall Street grew

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