The housing bubble

The whole mortgage debacle is a classic case of greed and corruption gone wild.  The causes of the crisis are:

-Interest rates kept artificially low by the FED to juice the economy in the short term.  Since putting savings in the bank is stupid (with interest rates below the rate of inflation) people look for other investments, thus we have had the internet bubble, the property bubble, and now the commodities bubble.  If interest rates had been set by the market, they would have been higher which would have cooled the housing bubble and made bank savings more attractive.

-Repeal of Glass-Stiegel and a collapse of proper regulation due to banks buying politicians and regulatory agencies, so no effective oversight.

-The Community Reinvestment Act, the bailout of S&L and Long Term Capital Management and the government backing Freddie and Fanny, all distorted the market and helped to foment massive moral hazard.

-Greedy property buyers who thought that all they had to do was buy a house and flip it or refinance, and they would be on easy street.  And they did for many years until the bubble popped and people got caught massively being over extended.

-The whole financial industry which peddled unsustainable loans to greedy buyers.

-The regulatory agencies which utterly failed to do their job of accurately assessing risk.

-The media and politicians who constantly cheered the whole process on with giddy delight.

In sum, it was a perfect storm of greed and corruption, and once the whole process got started so many people were making so much money of off it that no one wanted to blow the whistle and spoil the great party.  The politicians, the media, the banks, the public, everyone was in on it and cheering it on.  The few lone voices at the time who pointed out the obvious-that it was unsustainable-were sidelined and ridiculed.

Now that the house of cards has come tumbling down, everyone who participated in the debacle wants to be bailed out by the responsible people who lived within their means.  The politicians of course have not taken responsibility and have made matters worse by bailing everyone out with money we don´t have.  The banks acted recklessly and have been rewarded for the temerity with massive government supports (so we can have more moral hazard).

Finally property owners wail and moan about losing a house that they never owned outright and should have never bought in the first place.  I have some sympathy for people who may have unexpectedly fallen on hard times and cannot make their payments, but huge numbers of people bought houses with absurd mortgages-in other words completely speculative properties hoping to flip them before the real mortgage payments kicked in.  They knew that they could not make the payments normally, but with teaser rates they could hold on for a couple of years just long enough to flip the property and make a killing.  Others got caught up in the hype and mania and figured that real estate was so lucrative the one could never go wrong buying no matter what the math said.  In sum a tale of greed and stupidity.  Now the people who bought these ridiculously speculative investments are surprised and indignant that housing prices have actually gone down, as if assets in a bubble can only go up.  Furthermore, they demand that the government bail them out or suspend foreclosures so they can live in a house that they don´t own for free.  Like with the banks it has privatized profits and socialized losses. There seems to be this mentality in America that once people buy a house they belong to a special privileged class which entitles them to live in houses that they have not paid for.  No one worries if stock purchases are underwater, or if renters are thrown out for not paying the rent, but apparently it is unacceptable for houses to drop in value and for people to lose a house that they cannot pay for.  I have an idea.  Let the government rescue the property owners, IF the property owners agree to give back all the money they made during the good years.  I suppose that the mentality of the hype is still with us and we are having a hard time adjusting the reality.

But adjust to reality we must.  The government´s efforts to artificially keep housing prices high (Federal Housing Authority Loans, Tax Deductions) is just delaying the inevitable with money that we don´t have.  The sooner we get to real market prices the better it will be.  We will have to accept that all that money that was made during the bubble will have to be lost by someone else.  I say let´s bite the bullet and accept the pain now so we can get past it, rather than to drag the whole painful process out for years to come.


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