Bailout Nation: The Dynamics of the Downturn

By Brian Summerfield, Online Editor, REALTOR® Magazine

Bailout NationQUICK SKIM

As Scottish writer Robert Louis Stevenson once said, “Everybody, soon or late, sits down to a banquet of consequences.” In his book Bailout Nation, author Barry Ritholtz lays out the causes and effects of the recent economic downturn in a voluminous feast for the market-minded reader. In a clear and entertaining fashion, he explains how the evolution of big business and big government led us to our current state, and offers important lessons about the interrelationship of money, credit, and value along the way. He also discusses problems that led to a meltdown in real estate, and provides a few suggestions on how to avoid these difficulties in the future.

In sum, if you’ve ever wondered why the Federal Reserve exists, why Bear Stearns was bailed out but Lehman Brothers wasn’t, and why your local classic rock radio station seems to play the same 20 songs over and over again, this book is for you.



1. Government-sponsored enterprises (GSEs) can work: The recent collapse of Fannie Mae and Freddie Mac has some questioning whether GSEs should be used as a means to finance mortgages. While an argument can be made that the private sector could more effectively and efficiently manage the secondary mortgage market, one organization showed how GSEs can successfully perform this function: the Home Owners’ Loan Corporation (HOLC), which was created by the Home Owners’ Loan Act of 1933. This institution held more than one-fifth of all mortgages in the United States, with the lending total amounting to about 5 percent of U.S. gross domestic product. When the HOLC was liquidated in 1951, it returned a $14 million profit to the U.S. Treasury.

2. The housing bubble was actually a credit bubble: To clarify, the mania in housing was driven by an unprecedented laxity and availability of funds in the credit market. And a great deal of this capital flow was facilitated by non-depository mortgage originators, who relied on a legion of brokers to promote subprime mortgages. Moreover, loose lending didn’t solely impact real estate—recall the levels of retail spending around this time.

3. Price decreases aren’t always a bad thing: According to Ritholtz, the areas that have the greatest sales volume right now are the ones that have had the most dramatic price decreases. Lower prices lure people in because buyers aren’t willing to overpay for houses in a normal lending environment (that is, one that doesn’t have easy credit, low rates, and exotic financing structures).

4. The starter-home market is key: If first-time buyers can’t afford homes, then the housing market breaks down. This was one of the problems with the housing boom: Many savvy first-time buyers who understood the different kinds of mortgages and what they could truly afford were put off by the high prices and often decided not to purchase. The good news about today’s market is that it’s being driven largely by these consumers (due in large part to the tax credit).

5. No one should want or expect a return to the boom years: What would you rather have: four to five years of extremely rapid growth in housing prices followed by four to five years of decline and stagnation, or a decade of solid, steady progress? A few might opt for the former, thinking they could game the markets perfectly, but most would probably pick the latter. Furthermore, the financial conditions that produced the boom in housing were a kind of destructive anomaly, something like a Black Swan Event. Even if we wanted it to happen all over again, the odds are heavily against it.



“In most business cycles, it is the economy that drives real estate. Job creation and wage growth are the key drivers of home purchases. Buyers save for a down payment, get approved for a mortgage, and then go shopping to buy a home. While interest rates are an important factor, in the typical cycle it’s the economy that matters most.

“But that’s not how it happened this time.

“The 2002-2007 housing cycle was historically unique. The combination of ultralow rates, new types of exotic mortgages, changes in lending standards, and massive securitization created the perfect storm for a housing boom. Consider for a moment a normal economy, with robust job creation and healthy wage gains. Under those circumstances, high-risk subprime loans and innovative mortgages would have been totally unnecessary. Without the very low rates or the new exotic debt instruments, the biggest growth in housing since World War II would not have occurred. It was that dangerous combination—and not job or income gains—that led to the unprecedented U.S. housing boom.”


Barry Ritholtz writes the The Big Picture blog, an economic analysis blog that has received more than 50 million page views since launching. He also is the CEO and director of Equity Research at Fusion IQ, an online qualitative research firm. Ritholtz is a frequent guest on CNBC, a regular guest on the TV programs Fast Money and Kudlow & Company, and author of the “Apprenticed Investor” column at

Brian Summerfield

Brian Summerfield is Manager of Business Development and Outreach for NAR Commercial and Global Services. He can be reached at

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  1. Hi there,

    I agree that money was too loose. The standards were dropped to the point of being rediculous. I have been in the real estate sales business for more then 43 years and some of what I had been bumping into for the past several years had me just shaking my head. Either I was getting too old for this business or some folks had just gone plain nuts, allowing Buyers to spend up to 54% of their gross monthly income for a home was just stupid. The other side of this is there is some blame to go arround to most of us. No question government encouraged this type of behavior, as did some of the lending community (but certainly not all) but we Realtors, Buyers, appraisers and attorneys share some reasonponsibility here as well.

    I think you are correct that a strong economy is the underlying basis of a healthy housing market as well as a healthy lifestyle in general. I believe we started slowly ripping the back bone out of our economy years ago. Call it greed, call it over regulation, call it whatever you want but, in my opinion, we cannot survise in a service only econmy. We need manufacturing. Manufacturing is the backbone, the underlying essence of a strong economy. We just don’t seem make much anymore.

    History tells us that people grow content and lazy when times are good. We tend to just roll along and enjoy the fruits of life. It seems to take a war to rally the nation back together and fight for a common cause. Perhaps we need a war. Not nessessarily a war with other nations with guns and bombs (trust me, I’m not a pacifiest) but an economic war. I think we need to recapture the spirit of the 50’s and 60’s, we need to wantr to work, be proud of our work, and encourage manufacturing here in the USA. Just a thought. On our present track I suspect that the history books will say my generation lived through the best years in the USA. I hope I’m wrong, I would love to think that my grand children and their grand children will have the opportunities for a great life, hopefully better then mine.