“While that is true, this article paints the relaxing of mortgage standards as the culprit. It was not. If people had continued to have jobs, they would have been able to pay the mortgages. The REAL CULPRIT was the oil price shock. . . . Mortgage failures are the symptom, not the cause. And Mortgage failures occur in almost every economic downturn, frequently causing the economic downturn to be termed a “real estate bubble” when it’s not really.”
I don’t think this is correct. Economies will always have “shocks.” Oil prices, Katrina, 9/11, inventories too high . . . etc. Badly overleveraged economies respond badly to shocks because the shock starts a process of deleveraging. Deleveraging begets more deleveraging. But a non-bubbly economy takes a little hit and starts growing again.
So the “cause” may be the “shock.” But the difference between a quick recession and a depression is the amount of leverage. By that measure, relaxing mortgage standards was a very big deal and a major contributor to the mess we have today.
Oil Prices have not been a "little hit" it's been a major hit. It's a much worse scenario than in the early 70's when we also took a major hit from oil prices. This would have been a major economic hit even without leverage. Energy prices are one of the 4 or 5 key inputs to the economy.
To suggest that oil price increases would have been an economic cake walk if not for mortgage leverage is not in my opinion credible.
I agree that leverage magnifies the intensity of a recession. But mortgage debt is less of a magnifier than other forms of debt. People have to live somewhere. They are paying rent or they are paying a mortgage. They may be doubling up with multiple families occupying a residence. But they can do that whether they are renting or paying mortgages. So mortgage leverage is not that great of a magnifier.
In the absence of the mortgage leverage, you'd have seen a commercial real estate crisis first with rental units going bust. Granted that commercial real estate may have more equity backing. The problem would show up in Insurance company stability, REITs going bust, etc.. and wouldn't have hit the banks quite as hard, but the net impact to the economy would probably have been pretty much the same.