Who's to Blame for the Housing Bubble?
If you're looking for a scapegoat for the Fall of 2008, there are more than enough to go around -- start by looking in the mirror.
Who's to blame for a bubble? It is a profound question, this. Because as much as some folks are tired of talking about bubbles – I must confess I'm one of those that is – the reality is there are still plenty of people who are not. You can read it in the stories about Occupy Wall Street. You can hear it when people still talk about home prices that are a hell of a lot lower now than they were five years ago. And the home sales that are a fraction of what they were. And the mortgage put-backs. And the blight that is on the land in the form of busted real estate projects, shattered hopes and broken dreams.
So, who is to blame for a bubble gone wrong? A lot of attention has been focused on the banks. After all, many banks were recipients of TARP, and then after the Fed's boatyard launched various QE cruise ships, many folks sat speechless as bonuses were paid out at those banks, thanks to the profits they could earn due to historically high spreads on the yield curve. A three-month/30-year spread around 450 basis points? To paraphrase the GEICO commercial of old, it's so easy a banker could do it:
But enough talk of bankers, bonuses and bond yield bonanzas. The blame for the Fall of '08 goes back further. Because you see, while the Fall of '08 was an event in and of itself, it was really just a mechanical failure in the car we call finance, on the highway we call economic and financial history.
We've seen this before when the Model T broke down in the Bank Panic of 1907 (I know the Model T was actually produced starting in 1908, but bear with me; the beauty of the analogy trumps historic accuracy here), the Model A that broke down in The Great Depression and, more recently, the breakdowns of the AMC-owned (but French built) Renault Alliance during the S&L crisis in the 1980s and now the disastrous breakdown during the Fall of '08 of what we thought was a Maserati. Turns out that Maserati may have been a Fiat. Or worse, an Alfa Romeo. But that's what happens when you have debt goggles on. You think you're getting a much better deal than you really are, and you think you have a lot more time to pay for things than you actually do.
So what happened? How did we allow this thing to break down? Well, like a lot of events that happen where people, as Charles Mackay said, "go mad in herds, while they only recover their senses slowly, and one by one," the signs were everywhere if you cared to look for them while the madness was occurring.
What am I talking about? I'm talking about housing, of course. Because while we may be angry at banks for robo-signing documents and paying bonuses now, folks weren't paying attention in the run-up to this calamity. From FBI reports back in 2004 that expressed concern about fraud to the increased use of Alt A and Option ARM mortgage products, signs were everywhere. Signs that would ultimately be ignored.
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