Juan David Linares and Luciana Rodriguez
According to economist and Nobel Prize winner Paul Krugman, the subprime mortgage crisis—more commonly known as the 2008 housing crisis—could be described as “This looks an awful lot like the beginning of a second Great Depression.” For this reason, this paper will evaluate, through data and research, the conditions before, during, and after the crisis regarding the factors of production (Land, Labor, Capital, and Entrepreneurship), and how these elements contributed to the development of the crisis. The ultimate goal is to demonstrate how these factors are key indicators and reference points for an economy and its potential future.
To begin with, before the crisis, the United States was experiencing one of its strongest economic periods, with a 3.3% GDP growth in 2007. This translated into a drop in interest rates from 6.5% in 2000 to 4.25% by the end of 2007, allowing more people to access housing loans. As former President George W. Bush stated, the aim was that “every American could become a homeowner.” This context is highly relevant, as it triggered the crisis, which will be further explained below. The key point is that banks held high capital levels due to the country’s economic growth, enabling them to lend more money to individuals for property purchases. This led to increased property prices and higher revenues for financial institutions, which allowed them to issue even more loans, hire more employees, and offer higher salaries, thus enabling more people to qualify for credit. This created a vicious cycle in which the supposed economic growth turned into a speculative bubble that, inevitably, had to burst.
A brief explanation of the 2008 crisis is that it officially began on September 15 with the bankruptcy of Lehman Brothers. However, its roots can be traced back to 2006, when the housing bubble began to inflate. Banks were issuing loans to virtually anyone, regardless of their actual financial capacity to repay them (subprime debt), aiming to mobilize their vast capital reserves. The issue did not stop there: these debts were repackaged and sold to investment funds. The downfall came when these subprime borrowers began to default on their payments, triggering a liquidity crisis that ultimately caused the debt system to collapse.
The above explanation aims to clarify why people began to default on their mortgages, which eventually resulted in 11 million properties being foreclosed, an immeasurable loss for banks. This led to an oversupply in the housing market and a subsequent collapse in property prices, as consumer confidence and willingness to purchase real estate plummeted. Together, these factors caused banks to rapidly lose liquidity. Without liquidity, their primary means of generating income became unfeasible, leading many financial institutions to bankruptcy. Those that survived were forced to implement massive layoffs—more than 30 million globally, with 8.7 million in the United States alone. All of this combined led to an alarming economic contraction: people had no income, so they stopped spending, and money stopped circulating at its previous level. In this context, entrepreneurial activity declined drastically, as there was no market to sell to and any existing assets were hoarded rather than invested, leaving little to no capital for innovation.
Over time, the economic fabric began to recover, though not without leaving clear marks. The most evident was the change in policy among surviving banks, which began to limit access to loans and prioritize security over short-term profitability. Regarding employment, while the number of jobs gradually recovered over the years, pre-crisis wage levels were never fully restored in many sectors, solidifying a trend of job insecurity and labor precariousness.
Meanwhile, the value of land and property also recovered in many markets, but the perception of real estate changed profoundly. What was once considered a safe and stable investment came to be viewed as a high-risk asset. Entrepreneurial spirit gradually returned alongside the broader economic recovery.
To conclude, the factors of production are in constant flux, and it is normal to see them fluctuate. However, a deep analysis of these factors allows us to assess the state of a country’s economy, anticipate potential crises, and identify promising sectors for development. Therefore, understanding them is essential for anyone who aspires to succeed in life. I believe the best way to summarize this idea is with my adaptation of investor Paul Tudor Jones’s quote: “It’s not that they had unfair knowledge that others didn’t have, it’s that we did their homework.”