> From the issue dated April 17, 2009 > HOW DID THIS HAPPEN? > How 'Animal Spirits' Wrecked the Housing Market > > By GEORGE A. AKERLOF and ROBERT J. SHILLER > > Real-estate markets are almost as volatile as stock markets. Prices of > agricultural land, of commercial real estate, and of homes and condominiums > have gone through a series of huge bubbles, as if people never learned from > the previous ones. > > Such events — in particular the recent housing bubble — are driven by what > John Maynard Keynes called animal spirits, a naïve optimism at the > intersection of overconfidence, corruption, storytelling, and money illusion > (another Keynesian term, for views warped by currency's nominal value > instead of its purchasing value). > > For some reason, in the late 1990s and early 2000s, the idea that homes and > apartments were spectacular investments gained a stronghold in the public > imagination in the United States, and in many other countries as well. Not > only did prices go up, but there was palpable excitement about real-estate > investments.
"For some reason"? is that as good as they can do? I can think of three reasons: 1) the deregulation of finance allowed an elastic supply of credit, which allowed increased demand for mortgages, resulting in rising house prices, and a self-fulfilling prophecy. Alan Greenspan was an enabler here, since he pushed interest rates down to fight the recessionary effects of the collapse of the previous bubble. 2) the stagnant living standards suffered by most people in the US ran into increasing social pressure to buy more and more status goods (large screen TVs, etc.) The fact that home equity can be used as a way of providing consumer credit encouraged this kind of borrowing. Interest rates did not rise much, due to aforementioned elastic supply of credit. In addition, stagnant real incomes encouraged a "double or nothing" mentality: "maybe I can't really afford a mortgage, but if it works out, it's a solution to my problems; if it doesn't work out, it can't be that much worse that my current situation." 3) the rising incomes of the upper-middle and upper classes meant that the folks who typically have the funds and the self-confidence to "play" the housing market or to buy more than one house were encouraged. This raised the prices of rich-people's houses and prices of houses in general. >... Institutions changed because of the belief that the opportunities to take > part in the housing boom were not being shared fairly among all elements of > the population. Martin Luther King III, the son of the great civil-rights > leader, lamented in a 1999 editorial titled "Minority Housing Gap; Fannie > Mae, Freddie Mac Fall Short" that minorities were being left out of the > boom. He wrote, "Nearly 90 percent of all Americans, according to surveys by > HUD, believe that owning a home is better than renting one." Like everyone > else, minorities deserved this opportunity for wealth. > > The allegation of unfairness led to an almost immediate, and uncritical, > government reaction. Andrew M. Cuomo, secretary of the Department of Housing > and Urban Development, responded by aggressively increasing the mandated > lending by Fannie Mae and Freddie Mac to underserved communities, even if > that meant lowering credit standards and relaxing the requirements for > documentation from borrowers. He wanted results. The possibility of a future > decline in home prices was not his concern. He was a political appointee. > His charge was to secure economic justice for minorities, not to opine on > the future of home prices. > > There was never any serious examination of the premise that this policy was > in the best interest of minorities. In the overheated atmosphere, it was > easy for mortgage lenders to justify loosening their own lending standards. > A number of those new mortgage institutions became corrupt at the core. Some > mortgage originators were willing to lend to anyone, without regard to their > suitability for the loan. Corruption of that sort tends to flourish at times > when people have high expectations for the future.... I've been told that the encouragement of house ownership by relatively low income families was a legislative _quid quo pro_ for showering the financial sector with deregulation. Can anyone verify this? -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
