On 2/7/2011 12:41 PM, Doug Henwood wrote:
>> And you're right that the bubble could never have happened without credit availability. But I still see that as institutional, and I'm suspicious of the "weight of money" story.
> Why? Institutional investors have more money than they know what to do with. Their bankers see this, and help them out. Smarter bankers see that their clients are credulous and then pump out all the garbage they can devise.
So institutional investors want higher returns only when they have "too much money"? And bankers want to pump profitable garbage into the system only when the system has "too much money"? I thought these people were maximizers, not satisficers! Why didn't this stuff always go on?
In the 50's interest rates were incredibly low across the spectrum. Thus, the banks were "awash with money." But that didn't lead to any speculative mania or insane degradation of credit standards (that I know of). There were institutional and psychological reasons why not (starting with memories of the Depression and the higher value of bank charters in a more monopolistic industry).
Securitization was one part of a larger phenomenon of liberalization that increased credit availability, thus feeding the bubble. Securitization itself still exists in 2011, but there won't be another housing bubble for a long time. Many land bubbles have happened in the past - all involved disturbed mass psychology, but only one involved securitization, so it's hard to conclude that the latter was the key ingredient.
Credulousness is socially constructed. When a certain psychology sets in, people and institutions want to believe; when people want to believe, it's profitable to help them believe. I'm certainly not dismissing the journalistic accounts of mortgage insanity, but the Fed paper cited real analyst reports from 2005 etc. in which Wall St. analysts showed they understood very well that doomsday would arrive if house prices fell. From time to time, people would even say that on CNBC during the bubble years - it's just that you got hounded off the set if you predicted it would actually happen.
The Lehman deal described in the Fed paper - accompanied by Lehman's own model showing that HPA had to be huge for the product to be profitable - would Lehman have been able to sell that deal to "credulous" institutional investors in today's psychological environment? I can't imagine they would.
SA