On Dec 16, 2007, at 1:45 PM, Carrol Cox wrote:
> Doug Henwood wrote:
>>
>> On Dec 15, 2007, at 2:18 PM, bhandari at berkeley.edu wrote:
>>
>>> Krugman means that there was a tremendous amount of lending that
>>> created the bubble, as new home buyers were allowed to purchase
>>> homes with little or no money down, and as lenders allowed
>>> people who already owned home to refinance mortgages on the
>>> basis of fictitious home price gains.
>>>
>>> Why the speculative lending?
>>
>> Because it looked like a good way to make money. Why else?
>
> I don't think this tautology is responsive to Rakesh's question. It
> could be reworded, "Why did this look like a _better_ way of making
> money than _other_ available options (ASSUMING such options were
> available)?" And if other options were _not_ available, why was that?
> Your answer assumes the money men did nto canvass opportunities but
> merely responded to an isolated stimulus as though the rest of the
> world
> did not exist.
Everyone didn't get into the business. Bankers kept making ordinary working capital loans, venture capitalists kept funding early-stage firms, civil engineers kept designing and building bridges, etc. etc. Some people and some capital shifted out of other pursuits and into housing because it the risk/reward ratio was favorable. After a certain point, a bubble attracts all kinds of amateurs. Then it bursts. It's an ordinary story of ordinary capitalism, like it's been working for centuries. Ten years earlier it was dot.coms; twenty years earlier it was junk bonds; thirty or thirty-five, the Nifty Fifty....in the 1920s it was RCA and utility holding companies....in the 1870s it was railroads.... It's always something.
Doug