The Bubble
Among all the crisis-era talk about potential mistakes in the realm of financial regulation or deregulation, I think there’s been surprisingly little discussion of the underlying underlying issue — the crash in the housing bubble. Perhaps there’s been little discussion of it because there clearly isn’t some kind of pat regulatory solution whereby you ban housing price bubbles. But at the same time, I think the issue needs to be discussed more because the failure to do anything about the bubble reflects some really broad social and institutional failures.
The striking thing about the housing bubble, after all, is that it was extremely clear cut:
Not only was there never any reason to believe that the underlying value of the average American home had doubled between January of 1987 and March of 2006, but it was absolutely absurd to believe in March of 2006 that prices would, in general, continue to appreciate. And yet not only did many people believe that they would continue to appreciate, but many loans were issued that only made sense on the theory that appreciation would continue.
Now of course the situation was (and is) somewhat more complicated than that one chart can indicate. Homes can improve in quality. And in certain regions there are objective limits (imposed either by geography or regulatory fiat or both) to the supply of homes, so real price increases shouldn’t be out of the question. There was plenty of room for reasonable disagreement about the trajectory in any given city or neighborhood, or whether prices would ever fall all the way back to that 100 line. But in the main it was pretty clear that a speculative bubble was under way — rent/buy spreads were out of whack with historical norms, home ownership rates were out of whack with historical norms, and people were clearly making purchasing decisions that were predicated on the assumption that price increases would continue indefinitely.
Which isn’t to say that congress should have passed a law saying “nobody can pay a speculative premium for a house.” But by the winter of 2003-2004 things had already reached a point where responsible public officials and other kinds of civic leaders should have been trying to inform the public and calm things down. Instead, politicians were mostly doing nothing, Alan Greenspan was recommending that people get ARM mortgages, and the press was encouraging people to shift from a “these past seven years of price appreciations have been nice for incumbent homeowners” mentality to a mentality of rampant speculation. And the press wasn’t, it seems to me, doing this by coincidence — they were doing it because of a corrupt relationship between their real estate coverage and real estate advertising revenue. And public officials who could have been complaining about that didn’t say anything. And then of course there’s the irresponsible behavior of the financial institutions themselves. And that last bit is an important piece of the puzzle.
But it’s hardly the only one. A lot of us were warning back in 2004 and 2005 that things were headed out of control, and I really don’t think we were saying anything especially insightful or brilliant — we were just observing the obvious facts that prices and rent/buy ratios were at unusual levels and there was evidence of speculation everywhere. But the people with the big megaphones didn’t want to speak up.
66 Responses to “The Bubble”
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September 24th, 2008 at 3:32 pm
I found your blog on MSN Search. Nice writing. I will check back to read more.
Eric Hundin
September 24th, 2008 at 3:35 pm
Matt, you are really confusing me today. How can you put out a post like this on the same day you put out a post like this
You recognize we had a bubble and yet you’re suggesting Fannie and Freddie, now government owned, should keep it inflated.
Am I missing something here? Are you suggesting they should try to deflate it slowly rather than keep it inflated? Well, the only way they can do that is by suckering new buyers into buying homes right now that will surely decrease in value or remain stagnant for years, which is exactly what these buyers should not be doing.
If we recognize that current prices are unsustainable, we need to let them come down. It will be painful, but it has to happen. The bailout should not try to stop that, but rather should try to ease the pain of it.
Maybe I’m misinterpreting your two posts?
September 24th, 2008 at 3:37 pm
“Alan Greenspan was recommending that people get ARM mortgages”
The amazing thing about that one is how transparently and unquestionably bad advice it was at the time.
Dude is a financial war criminal. He should be in the Hague.
—–
A fair amount of the housing bubble should be understood as Greenspan’s attempt to push the results of stock bubble that crashed in ‘00 onto someone else’s tenure.
The stock bubble money went right into real estate.
September 24th, 2008 at 3:38 pm
This posts suffers in part from a hindsight bias as to how obvious it was that March 2006 was the top of the bubble. The reasons to think the bubble was about to burst in March 2006 seem to be the same reasons to think it was going to burst in March 2005, yet it turned out to be false in 2005 and true in 2006.
September 24th, 2008 at 3:40 pm
Sorry, but in what cloistered universe has there been “little discussion of the underlying issue — the crash in the housing bubble”??
The one other component that will start to gain some currency in the discussion are the unintended consequences of “equal opportunity lending:”
September 24th, 2008 at 3:45 pm
“This posts suffers in part from a hindsight bias as to how obvious it was that March 2006 was the top of the bubble.”
This is quite correct. Bubbles can go on or stop in ways that are quite hard to predict in advance.
In the long run they must pop to definitionally be a bubble, but that’s the long run. The short and medium terms are different.
The real estate market was pretty obviously in a bubble in 2002 and 2003, but “prices continued to appreciate” for quite a while after that point.
September 24th, 2008 at 3:48 pm
RE:The Bush/Paulson Record
nukev Says:
September 24th, 2008 at 11:53 am
Likewise, anybody (congress included) could see that the “sub-prime” disaster was coming and that double digit increases in housing prices were creating a bubble. Lots of people were culpable. None of it changes the fact that “something” needs to be done. I have no doubt the farce of a plan presented by Paulson will be scrapped. It seems to me that the sheer audacity of it was waving a red flag to get attention to a very serious situation. Hopefully, congressional Dem’s put together a “good” plan.
September 24th, 2008 at 3:50 pm
George W. Bush was endorsing for zero down payment mortgages in 2004.
September 24th, 2008 at 3:52 pm
This is why we have rent/buy ratios. This normalizes everything you have just mentioned.
Anyone who looked at rent/buy ratios in 2003-2004 saw that it made zero financial sense to buy instead of rent (including the much lauded tax benefits), unless you assumed asset price appreciation way above inflation. That is a textbook definition of speculation.
By 2004 the housing bubble was impossible to ignore. That is when the bubble blogs exploded on the scene (How I missed the hilarious “Overvalued” blog). Anyone who saw those rent/buy ratios and claimed there was no bubble was willfully ignorant.
September 24th, 2008 at 3:52 pm
RE “Alan Greenspan was recommending that people get ARM mortgages, ”
—————-
And our Brainiac Ben Bernanke was on the Fed –cheering Alan on and applauding Alan’s genius.
As I noted last night, Ben Bernanke’s middle name is “Shalom”. Which is Hebrew for “Nothing Broken, Nothing Missing”.
Jewish humor cracks me up.
September 24th, 2008 at 3:53 pm
In the end there is no painless way to correct the overvaluation of assets. The question ends up being- Who absorbs the pain?
September 24th, 2008 at 3:53 pm
See http://en.wikipedia.org/wiki/Bernanke and
http://en.wikipedia.org/wiki/Shalom
September 24th, 2008 at 3:54 pm
“Not only was there never any reason to believe that the underlying value of the average American home had doubled between January of 1987 and March of 2006,”
No, that’s believable (longterm real price increases on houses average about 3%). What’s not believable, accept in a bubble situation, is real house prices doubling between July 1999 and March 2006.
September 24th, 2008 at 3:55 pm
My personal anecdote RE the bubble. I could afford to by a house by around 2002. I looked into it, but we live in a very nice rent controlled apt. and said nah. I continued to watch. As each year went by I thought it was crazy. But the fever builds…
Everyone we knew had a house. And none of them ever shut up about how much money they made from it. Or that we must buy one too. Eventually you feel like you’re missing out.
I didn’t like the smell of things, but we started seriously looking in ‘06 because my wife was also feeling this pressure. We actually put in an offer for a place which our realtor said we probably wouldn’t get unless we went up by $50k. From the day we put it in, I really started digging into the data. Within 48 hours, I had pulled my offer and said, “no way in hell are we buying.” It took just a small amount of actual research for it to be obvious it was crazy to buy. Thank God I didn’t, but it took time to convince my wife we shouldn’t! I look like a genius now in her eyes!
But no one is required to disclose any of that to you. I’m a conservative person who works in finance, and even I got close to buying. The average person uses their realtor as their adviser on the economics of a house purchase. You need to go through more hoops and be told of more risks to buy a $10 stock then you do to take out a $500k loan on a house.
So most people had no idea about the bubble because the only people they got information from were already fully invested in the bubble.
The whole real estate game is balanced against the buyer because it’s all built on protecting housing values. No such thing as price discovery, shorting, etc. that are viewed as so vital to the stock market. You need to go in with a helmet on when you buy a house.
September 24th, 2008 at 4:00 pm
Look, a lot of very intelligent people are already discussing this and seem to think it’s more complicated, and I know nothing about economics that I don’t get from reading blogs and such, but why does this whole process not boil down to “Unregulated Credit Default Swaps”?
It seems simple to me (and again, I suspect that I’m wrong): as I understand it, if you are an insurance company, you are required to have a certain amount of capital on hand so that if your policies are called in, you’ve got the money to make good on your commitments. However, a while back, somebody got the idea of issuing insurance policies against loan defaults, but calling them “credit default swaps” instead of insurance, and (with help from Congress) thereby getting around the capital requirements. That to me is the whole story right there.
And it answers Matt’s question, too. After all, all (most) of the people issuing these loans weren’t complete idiots, they knew we were in a bubble, and they knew that many of these no-doc loans wouldn’t get repaid. But they could insure against those losses for cheap (due to the lack of capital requirements for CDSs), thus, they thought, leaving themselves in the clear once the bubble burst. And the people taking on the risk could just as easily pass it on to somebody else, and on and on until when the bubble finally burst, everybody thought they were covered, but since nobody had actually stored up any capital to pay out on these CDSs, everybody was holding worthless paper, not just the mortgage brokers. And so this is not the story of a “mortgage crisis”, that just happened to be the event that exposed an underlying instability. This is the “unregulated CDS” crisis, just like the Crash of ‘29 could be considered the “margin buying” crisis. If CDSs had capital requirements, then they wouldn’t have been so cheap, and mortgage brokers would have had to take the possibility of the bubble bursting more seriously. And even if they hadn’t, even if they’d made the same irresponsible loans, then they would have gone bankrupt, but the rest of the financial system would be carrying on just fine.
Somebody who knows what they’re talking about: is this story wrong?
September 24th, 2008 at 4:01 pm
The thing that I find interesting is the part of this that no one is bringing up:
In 2000, the stock bubble collapsed, and all the capital went into American real estate.
But now, the capital is partially moving offshore. The dollar devaluation has been the mechanism for removing value from real estate.
And the gigantic sucking sound of capital moving offshore means this bubble collapse is going to have more widespread effects than the stock bubble collapse.
In 2000, fortunes were lost, but the money didn’t disappear. This time, a good chunk of the money really is going to disappear from the nation’s wealth.
Time to dust off the political books on the ‘90 – ‘93 and ‘72 – ‘81 eras.
September 24th, 2008 at 4:07 pm
Real Estate prices, adjusted for inflation, 1890-2006, in roller coaster graph (youtube).
September 24th, 2008 at 4:10 pm
Another aspect of the housing bubble that gets scant attention is the role investors played in artificially raising prices. In Phoenix, where I live, entire new developments were sold to investors, diminishing stock, raising prices and leaving average home buyers in a position where they had to rely on winning on a lottery even to be able to make an offer. It got so bad that older trailer homes sitting on a patches of dirt in Phoenix sold for $250,000. A quarter of a million dollars for homes that are notorious for depreciating in value.
There were builders out here who would not honor purchase contracts because the base prices of their homes were escalating so fast, they could take the penalty for breaking a contract and still make tens of thousands more by selling to the next guy. People need to live somewhere and the insanity of the housing market lead to desperation. If prices are completely out of whack, but your lender is telling you “no problem–you qualify,” desperation is going to trump prudence every time.
September 24th, 2008 at 4:14 pm
As right-wing bloggers and commenters never cease to vomit up, that’s obviously the result of passing the CRA in 1977.
Because that would require blaming Phil Gramm and the financial institutions themselves for the mess they created, rather than shifting the blame to politically-correct liberals forcing banks to make bad loans to poor people and minorities.
September 24th, 2008 at 4:19 pm
Ohioboy, you may be right. It’s certainly a contributing factor, but I don’t know whether you can quantify how much of a contribution it is. None of us have any idea how much of these things were issued or sold, what they’re tied to, etc.
But one thing’s for sure. There’s a rule for insurance. No one can buy insurance unless they have a material interest in protecting the insured. So, for example, I can’t buy fire insurance on your house. Because I would then have a material interest in burning down your house.
CDSs being unregulated, didn’t have that rule. I could buy a CDS on someone else’s loan portfolio. This is, I believe, how Goldman Sachs made incredible profits last year while all of their competitors were getting killed. Insurance is never something that you should be able to trade.
September 24th, 2008 at 4:21 pm
This article, “Democrats To Blame for Economic Crisis” is really good. Don’t be fooled by the title.It systematically eviscerates the argument on Bloomberg by Kevin Hassett that tries to argue that the Democrats caused this subprime meltdown. Some great research.
Worth reading.
September 24th, 2008 at 4:25 pm
I don’t understand one thing — why are the Wall Street CEOs being hit over compensation but the Fuck UP in CHief is not?
I think the Bailout Bill should require George W Bush to cough up 50 percent of his net worth as part of the Bailout. To compensate us for being a dumb fuck the last 8 years.
Go ahead –ask him tonight after his gloom and doom speech.
September 24th, 2008 at 4:25 pm
While this is true, it only excuses some people. Everyone knew the bubble would burst fairly soon. A buyer who wanted to sell in five years could have been lucky and had the bubble burst in 6. The lender who immediately sold the mortgage to someone else obviously made a good move. Even a buyer who wanted to keep their house 30 years would be OK, as long as they got a loan they could handle. After all, the market will be irrationally high again someday.
The people who were unadulterated idiots were the investors. They bought and held these mortgage backed securities as long term investments with an absolute guarantee that they would lose an enormous amout of value at some point. What possible sequence of events would lead to another outcome? Did they really believe that the bubble wouldn’t burst for another ten years?
If they had not been so stupidly buying these mortgages from the lenders, the lenders would have stopped making these loans. If the lenders had stopped making these loans, people would have stopped buying houses for much more than they were worth.
Yet these, the stupidist people in this cycle, are the ones we’re targetting for a big money drop.
September 24th, 2008 at 4:26 pm
Yeah John Barley… I love it when Republicans advance article’s by the guy that wrote a book titled: DOW 36,000.
September 24th, 2008 at 4:27 pm
Among all the crisis-era talk about potential mistakes in the realm of financial regulation or deregulation, I think there’s been surprisingly little discussion of the underlying underlying issue — the crash in the housing bubble
You really need to expand your reading list.
In fact, I thought you had been reading calculated risk and angry bear for a while now.
September 24th, 2008 at 4:27 pm
Another lesson from the graph: be careful about buying houses built during the bubble years. The sheeple were so frantic to buy, or speculate in, houses they would overlook shoddy construction and the builders knew it. A lot of the houses are just crap. Maintaining them would be a nightmare.
September 24th, 2008 at 4:28 pm
Lots of people thought it was impossible that real estate can ever decrease in value. I used to think that too, before I bought my first house in Philly in 1988 and sold it at a loss – 9 years later.
Andrew Tobias wrote a really good column (in 2002!) saying why he thought there was a real estate bubble: http://www.andrewtobias.com/newcolumns/020703.html
He was right of course, although perhaps we can say “no one could have predicted” how long it would last and how much money would go down the toilet. All the realtors were saying, “this time it’s different!” It’s different, all right.
September 24th, 2008 at 4:31 pm
Alan Greenspan was recommending that people get ARM mortgages,
I’ve said before that this is one of stupidest memes generated over the two plus year history of this mess.
People that got over their head because they got into ill-suited ARM mortgages wouldn’t know who the frack Alan Greenspan was.
September 24th, 2008 at 4:32 pm
George W Bush is THE EXECUTIVE who is most at fault for this mess. Yes, Wall Street Executives were greedy –but at the end of the day, they were playing by the rules set by the Bush Administration.
It would be unfair to punish them without punishing George.
Make him cough up 50 percent of his net worth for the Bailout –or no deal.
September 24th, 2008 at 4:34 pm
“The people who were unadulterated idiots were the investors. They bought and held these mortgage backed securities as long term investments with an absolute guarantee that they would lose an enormous amout of value at some point. What possible sequence of events would lead to another outcome? Did they really believe that the bubble wouldn’t burst for another ten years?”
Njorl, I understand your point, but you’re forgetting a big element of this. The ratings agencies.
The ratings agencies built up a lot of trust over the years. If you’re a broker with dozens of clients, and you’ve been in business since 1995, and you’ve NEVER seen a AAA rated bond default, you’ve been trained to pull up your screen when someone calls to order a AAA bond, run a query and give them the best yield they can find, which happened to be these CDOs because the smart money did see the risk.
Total Black Swan event happening right now. A broker says, “I’ve been in the business 20 years, and I’ve never seen an MBS that was AAA rated default. The yields on these are way better than AAA rated corporate bonds, so why not get the higher yield? Same credit rating after all, which means same level of risk.”
Client say, “Oh, OK. Let’s do it.”
That’s how these get placed. The investment banks bought them up because they knew the ratings were there, and they knew they had many clients who wanted high yielding AAA paper.
You’d be amazed how little thought goes into most investing.
We’ve put up all of these things that give us the illusion of safety, including the ratings agencies, but they don’t give us actual safety.
September 24th, 2008 at 4:51 pm
If a responsible pubic figure in America suggested that real estate was not a good investment he would soon be a responsible private figure. Probably an unemployed one with no friends. There are certain things that are verbotten in American politics and dissing real estate is number one.
Traditionally half of all American wealth is real estate based. No politician in his right mind can risk hurting confidence in the most important asset among voters. Even if people were awakened to the truth of such a statement they would hate him for saying it.
As Mencken said. The men the American people admire most extravagantly are the most daring liars; the men they detest most violently are those who try and tell them the truth
September 24th, 2008 at 4:52 pm
In the 20s, when regular people who knew nothing about the market started playing stocks with a passion, a development also supported and much discussed in the media of the time, the warning signs of a crash were laid.
The same thing began to happen in 2004. Soon everyone was talking about “flipping” houses. In the market, it seemed like more than half of the new houses coming on the market in developments were bought by speculators (not a bad idea then, as it turns out, just a bad idea at in 2007).
The same thing happened near the end of the 90s with tech stocks.
History is content to display many warning signs. But that gets in the way of speculator profits, and isn’t “optomistic” enough for the America of George Bush.
So let the good times roll until someone ends up holding the bag.
September 24th, 2008 at 4:52 pm
A lot of us were warning back in 2004 and 2005 that things were headed out of control, [emphasis added]
[emphasis added]
Now I almost understand how Petey continues to be all pissed off at you.
September 24th, 2008 at 5:20 pm
Matthew: Householder debt in the US is 100% of the GNP or 13 trillion dollars. The financial company debt is 16 trillion dollars. We live in an economy that depends upon consumers to borrow and spend. When the house prices rose so did the equity in them enabling us all to borrow against it so we could spend. As the house prices rose, the estimated of the mortgage packages the banks put together rose. That enabled the lenders to lend more and more. It was all artificial.
Now Paulson and Bernanke are smart enough to know that but they also know if people don’t keep spending the economy flops. They are caught in a situation where people with too much leverage (money owed)have no money left to spend yet their only solution is to make available to them more leverage to keep the economy going. They want to give booze to a drunk society because they are afraid to face it when it becomes sober.
Have you heard one word, just one, talking about the merits of saving?
Oh, and one other thing. The national debt under President Bush (I should call him President Bust) has gone up four trillion dollars to date, before this bail out. It took us 200 years to 1992 to reach the first four trillion. We live in the Bubble State of America.
September 24th, 2008 at 5:26 pm
Hard to believe someone in 2006 was thinking “Hmmm median incomes stagnating over 8 years while median home prices increased by double digits every year… hmmmm seems like a good investment/loan!” You’d think they might have stopped to wonder how much income and credit households were really willing to dump into housing to keep appreciation rising. I wonder if there was a Prisoner’s Dilemma effect here where even if people did realize that betting on eternally rising housing prices was a bad idea, failing to do so would lower short-run returns and get them fired for failing to perform.
September 24th, 2008 at 5:28 pm
Matt – One thing you’re missing here: cheap Chinese goods (check out the Planet Money podcast for more on this). We buy a huge amount of Chinese products, and the Chinese end up with a lot of dollars. What do they do with this unbalanced income? They buy stable investments. Specifically, they (indirectly) loan us money to buy houses.
This nearly inexhaustible pool of money (thanks for our nearly inexhaustible desire to buy cheap items we don’t really need) translated into inexpensive loans, which translated into higher home ownership, which further translated into higher housing prices.
Did everything change when the world realized many of these loans weren’t as secure as the world thought they were? I’d argue no. We will still keep buying cheap Chinese goods. The Chinese will still keep needing a place to put all of their dollars. The US housing market will still be a good place to put this money (though not quite as good of a place for a short period of time).
The result will be that housing prices will still be much higher than the ’90s – at least until we stop buying cheap Chinese goods, we build more housing supply, or until our economy collapses for completely separate reasons.
September 24th, 2008 at 5:51 pm
Of course you can regulate against house price bubbles. Ban crazy mortgage loan practices.
September 24th, 2008 at 6:31 pm
Re: People need to live somewhere and the insanity of the housing market lead to desperation.
It may be a four letter word but the solution to that problem was and remains: Rent (if you can’t afford to buy). Unlike housing costs rents remain stubbornly tied down to reality: there are no ARMs or other gimmicks that allow a renter to pretend to afford a place he really can’t, so landlords can only charge what the market can bear.
September 24th, 2008 at 6:33 pm
Matt the engineer, I don’t know if that makes a lot of difference specifically for mortgages. Any foreign government or entity that got completely burned on CDOs is not going to just hop right back in. But besides that, regarding China specifically, the Chinese government buys mostly US treasuries, not mortgage securities.
Yes, the money we get from China is used to pay for things like tax deductions for mortgages and susbidized mortgages, but the main impact to the housing market is the ability to maintain low interest rates. As long as there is significant demand for treasuries, the Fed can keep rates low and the dollar relatively strong.
It’s not as direct as you’re saying, where cheap crap gets bought, money gets invested in mortgages. There are a bunch more hops than that, and it’s been going on a lot longer than 7 years. I think the CDOs, CDSs, and growth of “creative” mortgages” had more to do with it. Oh yeah, and the collective stupidity of hundreds of thousands of Americans.
September 24th, 2008 at 8:15 pm
There is nothing inherently wrong with ARM mortgages.
The problem was teaser rates and tiny downpayments.
September 24th, 2008 at 10:12 pm
And there’s not necessarily anything wrong with people taking mortgages they know they won’t be able to afford to pay. After all if somebody is giving you a free ride, and the worst that happens to you is you have to give back a house you couldn’t afford to live in the first place, on which you made no down payment, sounds like a smart move.
I actually don’t really understand all the hoopla about people in trouble on the mortgages. Payments on regular ARMs (i.e. without intro rates or negative amortization) haven’t changed all that much. Mainly the people bailing out are simply motivated by the fact that the equity is less than the loan balance, and if the loan is recourse only to the house itself, its sort of foolish not to bail on your mortgage.
The real criminals in my view, are the rating agencies who decided to be deliberately moronic when the assumed the historical rate of mortgage default (in a world where almost all loans were 30 year fixed to good credit risks with 20% down) would continue when all the factors that drove that rate have changed.
September 24th, 2008 at 11:02 pm
Give everybody with a pulse free money and start calling housing debt an “investment.” Sew underwriter’s into cloth sacks with a wild dog if they don’t “approve” loans and you get what happend.
Just don’t do THAT again!
September 24th, 2008 at 11:42 pm
You’re wrong about the connection between media and real estate advertising during the boom. When the market is hot, home sellers don’t need advertising. It’s when buyers get scarce that real estate advertising goes up.
September 25th, 2008 at 2:19 am
Look, the housing bubble just ain’t the cause of this mess. People always default on their mortgages. The rate of foreclosure is higher than normal (thanks mostly to the afore-mentioned ARMs rather than the price of the house) but not so high as to have a serious impact outside a few specific communities (Las Vegas).
Spain just had an even bigger housing bubble burst with no major ill effects on their banking system.
The CDOs aren’t even the cause either. Bonds (even highly rated bonds) default. Argentina defaulted on 128 billion worth of bonds in 2002. Banks did not go under.
The main difference between the Spanish banks and the US banks is that the Spanish banks were required to maintain strict levels of capital adequacy in accordance with the Basel rules.
US banks either because they were investment banks or because they moved the risks off balance sheet (which is illegal in Spain) did not need to maintain sufficient reserves. This is how they got to be 30-1 leveraged. This is the big change that has put everyone at risk. In 2000, a 3-1 leverage was considered high end risky. In 2008, 30-1 is the norm.
If the US banks had maintained their correct risk profiles and had held sufficient reserves, there would be no need for any bail-out. It is just that simple.
Sound banking practices = sound banking system.
September 25th, 2008 at 2:37 am
“there clearly isn’t some kind of pat regulatory solution whereby you ban housing price bubbles.”
I get your point, Matt, but I think it was William McChesney Martin, Fed chair during Ike’s admin, who said his job was to take away the punch bowl before the party got out of hand.
This also allows me to note that not once since the campaign began for the GOP nomination have I heard a single Republican cite Eisenhower as a GOP worthy, much less a role model.
September 25th, 2008 at 3:07 am
“But it’s hardly the only one. A lot of us were warning back in 2004 and 2005 that things were headed out of control, and I really don’t think we were saying anything especially insightful or brilliant — we were just observing the obvious facts that prices and rent/buy ratios were at unusual levels and there was evidence of speculation everywhere. But the people with the big megaphones didn’t want to speak up.”
The problem is that “There is a housing bubble” isn’t a policy. The two main ways of bursting the bubble, requiring large down payments, or starting a huge recession by hiking interest rates 4-6%, aren’t great policies.
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