[lbo-talk] origins of the housing boom

Indian Jones lburgindianjones at gmail.com
Mon Aug 29 16:43:10 PDT 2011

SA wrote:
> That's why I'm
> dissatisfied with attempts to explain the bubble by pointing at
> contingent details like those, either singly or combined.

Are you happier with "The blowup occured because of the usual reason: if some is good, more is better"?

> I think the "first cause" of the 2000's bubble was simply the formation of
> expectations among home-buyers that house prices would rise at fantastic
> rates - perhaps generalizing from localized examples of this from the boom
> years of the 1990's, when certain localities received sudden influxes of
> very wealthy people, resulting in massive - but stable - increases in home
> values. Once those expectations became generalized, it turns out that the
> complex financial stuff that claimed to disperse risk - MBS, CDOs, etc. -
> was more or less rational. I think the data show that most of those
> financial products actually would have paid off if home prices had met the
> forecasts embedded in the Wall Street models. It was the hysterical
> forecast of price appreciation, not the "hiding" of risk (it was never
> really hidden), that constituted the bubble.

Correlated and massive risk based on hysterical forecasts can be assumed away by wishes? That would also be confidence-gaming. Rather, this somewhere realized risk was hidden.

> The important thing was the expectation of permanently high
> house prices; once people believe in that, it doesn't take much to
> convince them to put money in the mortgage market.

So, once people begin to fail believing in that there is no attempt to keep the confidence up? Completely unconvincing. Somebodies knew and hid the risk.

More information about the lbo-talk mailing list