Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

In due course, the inversion of the yield curve might by itself have produced a recession. But it wasn’t Greenspan or Bernanke who killed the mortgage boom. It killed itself. By 2005 at the latest it was clear that low-quality mortgage debt was a ticking bomb. Many of the subprime mortgages were on balloon rates that would rapidly increase after a period of two or three years. In 2007 the typical adjustable-rate mortgage in the United States favored by low-income borrowers was resetting from an annual rate of 7–8 percent to 10–10.5 percent.65 As traders such as Greg Lippmann at Deutsche Bank realized, between August 2006 and August 2009, $738 billion in mortgages would experience “payment shock.”66 As the escalated interest payments hit, a wave of defaults was more or less inevitable. Once that began it was only a matter of time before house prices stopped increasing and the market turned. At that point, millions of speculative real estate investments would go bad. Families would lose their homes. Thousands of MBS would suffer default and whoever held insurance would get rich. Nowhere in Lippmann’s extensive document arguing for Deutsche Bank to short MBS was there any mention of Fed tightening. The subprime mortgage machine had a self-tightening timer built in. Unless house prices continued to rise at record rates, it would activate mercilessly and stop the boom in its tracks.