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. In other words, this was
about a classic national mania - a la Charles Mackay - rather than the
necessary outgrowth of evolutions in rates of return to money-capital.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
Okay, but how do you not include the role that financial innovations
and policy changes played in the ability of lenders to increase their
leverage. Surely, this increased the pressure to lend which helped
with the inflation of the bubble. I don't see how it could simply be
a one way relationship. Wouldn't the two work together to inflate the
bubble?
Brad