In the years since the start of the biggest American financial crisis in generations, the reasons for the meltdown have begun to harden into conventional wisdom. Everyone agrees on the root of the problem: a housing market that ballooned wildly, then collapsed. But exactly where to place the blame is a matter of dispute. Conservatives tend to point the finger at the individual homeowners who took out loans they were incapable of paying back—and ultimately, at the government that pushed for looser lending standards in the first place. Those who lean left point squarely at the financial industry, which flooded the market with deceptive mortgages and then sold the risk off in the form of complicated new securities.
Then there’s Paul Willen, a research economist at the Federal Reserve Bank of Boston.
Comments
It's useful to have a provocateur in a field, and clearly Willen is playing that role in economics. There are a few angles that don't seem to have adequate representation in this discussion. First is that the discussion of cause and effect is far too narrow. Trying to identify "the cause" of the crash ignores a broader, systemic point of view which allows for many different variables interacting in such a way that there are many different contributors to any given situation. The second variable which is ignored is the vast potential for irrationality in the marketplace. When it takes two professional salaries to afford one small house that used to be owned and paid for by the single salary of the school janitor, there is a misfit between salary structure and house prices. The social structure of housing people has broken down. One last variable which is given inadequate attention is the limitless potential for the impact of greed. Everyone in the housing industry, ranging from builders, to real estate sales, to lenders, and on up the line, have a vested interest in house prices increasing. Given the formulas for their fees, the higher the price, the more profit. Economics as a discipline would do well to address these fundamental human tendencies.
To say no one saw the housing bubble coming because of belief in increasing housing value is false. Unfortunately the ones making the decisions on financing were not in that category. There was a group of economists who put out warning after warning to no avail. So we are left with two roads to follow. Either the more cautious economists get more prominence with proper back and forth to seek out a rational road or reinstate Glass-Steagall regulations that put some reasonable brakes on too enticing speculative investments in housing or otherwise. On one side stand people who can't resist a too good to be true deal and complete ignorance of what's happening on the other. They can not be left to their own devices. It affects the rest of us by making a mockery of American worker productivity while allowing an over compensated financial industry to continue along its merry way.
The ones making the decisions on financing, the buyer, the appraiser and the bank must hold the responsibility. For example, my place was recently appraised at $180,000. I wouldn't pay $150,000 for it. In my mind, it's not worth 20% more. I understand that a willing buyer and a willing seller make a deal, but where were realists in the banking industry saying, "whoa, here." I think we had an exuberance that, in effect, said, "everybody can be made happy, and be happy -- builder, seller, buyer and bank -- if we just goose the price." That means that lenders weren't realistic about the values of property in their lending areas, appraisers were falling prey to a desire to stay on the "list" of the bank's approved appraisers, and borrowers were falling into the trap of imprudent (for them) mortgage products that required little down, low payments for the first few years and huge increases in later years. Finally, the government, particularly the Bush Administration, which pushed this "opportunity society" program which told citizens that everyone could own a home, created a climate that told the other partners in the housing market to just close it's eyes and forget about the reality of the economy. We're all to blame.
Is my 65 year old brain missing something? Prices doubled, in what 5-6 years? If that is not a bubble, what pray tell is? 1990 was only 18 years previous, maybe we need more old farts calling the shots.
Many people knew we were in a bubble, but weren't sure when it would end and were afraid of leaving money on the table. Someone once told me that the driver behind real estate appreciation is the ability of Generation A to sell their houses to Generation B (their children), and if Gen B can no longer to buy their parents' house, then housing prices will have to come down to the level where they can.
green-lady's comment tied into two questions I have regarding the following quote from the article: "While some, including the Yale University housing expert Robert Shiller, warned of a bubble during the boom, the prevailing point of view, all the way up the ladder to Fed chief Alan Greenspan, was that the real estate boom wasn't a bubble, but rather a reflection of fundamental changes in the economy." FIRST QUESTION: Why did skepticism by someone as respected as Shiller not raise more alarms? SECOND QUESTION: Why did Greenspan et al. assume the economy had fundamentally changed? [NEW PARAGRAPH] It's water under the bridge now, but if we can figure out the answers to the two questions, we MIGHT be better inoculated against a new bubble.
I'm with green lady. The more mature people I know kept saying that this was crazy, something was wrong; they just weren't sure what and didn't know about derivatives. So the professionals, who followed the market for a living, should have known something was wrong and discovered the cause.Younger people, fearing that however crazy the prices, they'd never catch up if they didn't stretch to "buy NOW", took a chance. Also, for future reference: it is never a good idea for the government to tell bankers they have to give mortgages, with no down payment, to poor people EVEN WHEN they know it's a bad idea, just because the government says so. I'm sticking with the blame game and watching Too Big to Fail one more time.
Every problem we have is caused by government...