How did the United States housing bubble form?
How did the United States housing bubble form?
Lack of any previous housing bubble, lots of money chasing AAA-rated bonds from low interest rates & lotsa savings. Some effect from federal housing laws.
Read The Big Short for more background. Michael Lewis is a great writer.
I just read The Big Short which is why I'm asking about it. It seemed like it was only telling part of the story in order to push a narrative.
Surely that isn't the end all be all source for the causes of the bubble, right?
Massive de-regulation and lack of enforcement of existing regulations. NINJA loans ensued.
At the same time under the Bush administration Congress and Dubya increased the money supply through fiscal policy. Greenspan needed to continue expanding the money supply through monetary policy, but Bush and Congress needed to keep fiscal policy tight if not make some budget cuts rather than tax cuts. They fucked up, but outside of economists you aren't going to hear anyone put the blame on the administration.
Instead you get the Tea Party etc vilifying Greenspan, who in all fairness fucked up by allowing NINJA loans and all other kinds of shit, but he was far from alone in blame.
A bubble forms when people stop caring about the underlying item, see its value go up, and start instead caring about other people's opinion of the underlying.
1. NINJA loans & easy money kicks things off as drives prices up with higher demand
2. "Housing's never collapsed nationwide"
3. Bubble forms (house flipping becomes a meme, people think homes return more than inflation, etc.)
The collapse was so bad because the AAA-rated mortgage bonds spread throughout the financial system, but the core bubble behavior has to do with those parts.
Are you two in agreement with each other? If not, can you point out areas you disagree in?
I'm just talking about bubble mechanics. I think is right about the source of easy money on the US side.
Obviously tons of European & Japanese mortgage buyers got in on the MBS glut with their savings, feeding the beast, but that happened later on (see Boomerang, again by Michael Lewis).
He's starting from micro to macro, I'm going from macro to micro. If you asked me to start from micro to macro to explain it I would say something similar.
Basically the macro-micro explanation is:
Congress and the Fed flooded the financial system with money
Financial institutions naturally poured their money into SOMETHING
It happened to be an effectively unregulated housing market
Bubble created through inflated values
Bubble pops and takes a ton of the market with it
The micro-macro explanation is:
The housing market was rising rapidly
Banks went to cash in on the real estate gold rush by pushing mortgages even against regulations
Enforcement doesn't happen
They securitize their loans with deceptive ratings
The loans circulate
My interpretation of your macro-micro explantion is that government policies unintentionally led to the bubble.
My interpretation of your micro-macro explanation is that banks intentionally abused the situation the government put in place.
Does this accurately sum up what you wrote?
I would say take them both and spread the blame around: the administration was either asleep at the wheel or was engaged in pork barrel spending in knowing in spite of knowing it endangered the economy because they wouldn't be blamed.
The banks knew enough about economics to know it was a danger to push money into that bubble. They did it anyway because they figured they couldn't lose. They didn't lose.
The bailout was negotiated by both parties. It paled in comparison to the level of emergency lending by the Fed. The responsible parties were the ones who determined who to put the blame on.
Did repealing glass-steagall have anything to do with the crash or is that a meme?
Yes, but laws on the books means little if enforcement isn't practiced. What is more concerning is that Dodd-Frank has been largely repealed.
I'm also drunk at this point so take more of my statements with a grain of salt.
People were acting as the bank with owner financing through a loophole
This. Loans on loans on loans.
Chinese millionaires buying incredible amounts of real estate
idk, but it was Obama's fault
Ask the Lehman brothers lol
Banks feeding on the greed of people
You've got $100K equity in your house, here's your check
financial institutions operated with reckless abandon
ordinary folks made absolutely abysmal financial decisions
government did nothing
people always want to blame one side, but it takes two to tango. i put more blame on the american populace desu. obviously their behavior was encouraged, and they were sold a dream, but my god, how fucking dumb do you have to be to leverage yourself like that? it's not surprising tough considering that so many people have terrible credit/lots of debt/no budget, etc.
I vaguely remember some State of the Union speech where Bush said that every American should have a home, and people believed him.
No it wasn't caused by de regulation. The crash was an effect of the banks having foreknowledge of bailouts.
The bubble was caused by the government pushing on the scales of the market because they feel plebs need to own homes. In a free market mortgage system it would never have happened.
Most people want to own homes; the government didn't magically create the demand for housing. The reality is "a free market mortgage system" would probably just finance more speculator-landlords and decrease overall private ownership since more people today are really in no way financially fit to afford owning a home. Conservative governments always need to push policies which try to get more citizens privately tied into the market and into the financial system so that everyone ends up having a little vested interest in seeing prices keep going up in the FIRE sector to prevent a general populist backlash against rising housing prices and rents so it ends up appearing as if their net worth is actually rising... even when their debt servicing obligations are also rising.
hey guys I know. let's force housing lenders to give out loans to anybody! no matter what.
fuck employment fuck interest lets just give out free money to everyone
wait what do you mean you guys can't pay me back??? what do you mean rich people took advantage this
it really isn't complicated. I don't see how it becomes complex. stop ducking with price signals
Dumbass ratings agencies, mostly. Basically looked at opaque super complex financial products and went "dude, idk what this is, but some of it is for sure good, so it's all good" and rated it AAA.
If they had done their job everything would have slowed down rather than ran off a cliff.