[lbo-talk] origins of the housing boom

Michael Pollak mpollak at panix.com
Mon Aug 29 19:20:30 PDT 2011

On Tue, 30 Aug 2011, Mike Beggs wrote:

> And let's not forget (c), cheap, readily available finance - which
> really has to be somewhere in the core of the explanation.

IMHO, that's what makes this housing bubble different from other housing bubbles. It's not simply that there was ready money, but that at the bottom of it, in both the US and Europe, there was free money, i.e., AAA rated bonds -- risk free assets -- that paid more than AAA bonds were supposed to. In the US, these fake AAA assets were created by the CDOs. In Europe, they were created by the Euro, which functioned as a collective CDO. In both cases, once they were created, there was an inexhaustible (and perfectly understandable) demand for them from banks the world over. And this led to a situation where finance drove economics. In the US, the desire to mint more CDOs, after all conceivable normal housing had been securitized, led necessarily to a huge fall-off in loan standards and loan quality to meet the accelerating volume requirements of demand. In Europe, a massive desire for the bonds of peripheral banks led to greenlighting of more and more preposterous overbuilding.

And in both cases, the banks built houses of cards on top of the AAA bonds, which was the whole purpose of buying them. Which is why it led to a worldwide financial crash, rather than regional or national financial crashes, like in the old days.


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