Krugman notices something.
This kind of implies all the theories about the causes of the mortgage crisis are wrong. Well, most of them.
Which theories would those be?
PBS and NPR have done at least a couple of stories that I’ve seen / heard about the commercial real-estate bubble and how it’s set to pop and pop big and ZOMG FINANCIAPOCALPYSE!!1!
Like unbongwah, I’m curious about what you think most theories of the cause of the mortgage crisis are.
I am a little surprised that the magnitude of the commercial real estate drop was more severe than residential. (I would have expected a less severe drop).
Most of the economists who called the real estate bubble have been talking about the commercial real estate crash - which started in 2008 and (supposedly) will bottom out (big) in 2010.
There’s a big glut of commercial floorspace out there, that was way way way overpaid for.
I think it probably already has bottomed out (or is close). Per square foot prices are already starting to rise in some markets. In fact, retail is already starting to show an increase again (though that may be a blip).
Anecdotally, I’m starting to see new stores opening up around here again where that retail space has been dead for the better part of a year.
People have a false sense of optimism about this recession for some reason - I am starting to think we are going to double dip.
The commercial markets are still bottoming out in NY and other major metro areas. We are not close to job growth, even though many economists predicted it this month (the same ones who couldn’t even predict this easily predictable recession) . The current stock market upswing is based off false optimism of a “quick” recovery - a double dip will crush stock values.
At this point about the only economist I’ll listen to is Dean Baker. He called the bubble in 2002, backed it up with sound numbers, and saved me a lot of money… and he is still predicting at least a 15% further fall in national housing prices (back to the rate of inflation - which it has tracked historically).
He called the bubble in 2002, backed it up with sound numbers, and saved me a lot of money.
Were you one of those who pulled all his money out of the market?
No - I had some assets already invested when I realized what was coming, and decided to ride the crash out without adding more (I’m young - so didn’t have much in their mid-decade anyway). I did pour a lot in when the market (finally) tanked in October and again in the early 2009 dip. Those investments have done VERY nicely for me (6$ GE - hello!).
Despite his warnings I eventually bought a house mid-bubble (2004) - but being mindful of his advise did save me a bundle long term. Unlike many friends, I locked in a long term mortgage at a great historic rate, and I bought a place to live - not an investment. As a result I have not lost any money in the housing crash.
Oh, I heard all the noise the GOP made about Fannie/Freddie and the CRA to which Krugman referred. I was wondering if Jason was thinking of any credible theories about the crisis.
Some non-CRA ones that don’t quite fit if the commercial market went bonkers too:
- That it was because people weren’t putting enough money down.
- That it was due to not enough regulation on the housing market.
- That it was due to derivatives.
- That it was due to home buyers either turning into idiots or new crop of home buyers showing up who couldn’t afford it/were idiots.
Maybe there’s something I’m missing, but to me this looks like evidence for the “too much foreign money looking to invest somewhere” theory. That begs the question of why it went into this asset class, though.
Well, that’s a bit of a tangent. The derivatives problem caused the housing crash to turn into a financial crisis, but didn’t cause the housing crash. The housing market crashed because prices were too high.
Now, if you want to talk about why housing prices were too high, derivatives did play a part. Securitization of mortgages lead to lower lending standards which lead to increased demand and increased prices.
While anecdotes aren’t data, I have to admit I was shocked at the number of vacant storefronts in LA and San Bernardino counties (where I was over Christmas). It literally seemed like every 5th or 6th retail space was empty, and every 10th or 15th house had a for sale sign out front.
The “big pool of money” theory is obviously part of the answer – and likely a big part. I think the derivitization also played a role, however, since without the derivatives, there wouldn’t have been any place in US real estate for all that money to go. From there, it all goes downhill.
Krugman only points out that it kills some of the Freddie Mac, etc., ideas of what was going on (it lets us rule out causes that pertain only to the housing market). He doesn’t make the leap you’re making and I don’t think you’ve justified your 1-4.
What we saw was a market where lending was too cheap and easy. If I take any market and give out loans that are too cheap with no questions asked then that market will bubble and probably burst once I run out of money to loan. #3 applies equally to commercial and non-commercial real estate. #1, #2 and #4 are symptoms of the cheap/unregulated credit. They aren’t the first step on the chain of causation but they are in the chain. They are important and they are indications of our system breaking down. However to fully understand them, yes, I think it’s important to note that they aren’t the root causes. I’m guessing if you look closely at CRE you’ll just find that there are similar examples of each of these problems. I.e. predatory lending to small business owners, business owners not saving enough and business owners being idiots.
Krugman only points out that it kills some of the Freddie Mac, etc., ideas of what was going on (it lets us rule out causes that pertain only to the housing market). He doesn’t make the leap you’re making and I don’t think you’ve justified your 1-4.
What we saw was a market where lending was too cheap and easy. If I take any market and give out loans that are too cheap with no questions asked then that market will bubble and probably burst once I run out of money to loan. #3 applies equally to commercial and non-commercial real estate. #1, #2 and #4 are symptoms of the cheap/unregulated credit. They aren’t the first step on the chain of causation but they are in the chain and we can certainly look at them as steps along the way to the crash.
Well, if there wasn’t a giant pile of overseas money, how would lending have gotten too cheap and easy? The runup we saw was crazy, and more like the 1990s tech boom/crash than it was a regular real estate boom/bust cycle.
Foreign money could be part of it, but Greenspan’s crazy low interest rates get a lot of the blame.
Interest rates can stay low if helpful Chinese people will lend you money.
It was just a really, really bad bubble.
The crazy derivatives were a means to leverage to an insane extent thus “creating” more money with which to continue lending. Why make your money on a loan once when you can make it several times over? Foreign investment could have been part of the picture but everyone was involved. Consumers way over-leveraging with unsustainable loans is really the exact same behavior as banks over-leveraging with unsustainable financial instruments, just at a smaller scale. The government pushing ridiculously low interest rates isn’t that different from foreign investors investing lots of cheap money.
You can’t just look for a magic bullet that killed the economy. You have to blame the banks, the people providing the banks with capital, the consumers and the government. They all bought in. You can go back and read about all of them behaving badly. Government institutions were ignoring data that said that the real estate market was in a bubble. Consumers were ignoring basic fiscal responsibility to hedge against risk. Banks were buying into a rating schemes and shenanigans, not because they were based on sound planning, but because they made more money today than anything else. Predatory lenders were seeing the short-term opportunity and doing their best to pry the door open as far as they could. Foreign investors were seeing lots of money flying by and wanted a piece. Etc.
P.S. note that had the core market been sound, foreign investment wouldn’t have made a difference. Foreign investment could only accelerate the rate at which the bubble grew and keep the bubble going longer before it finally burst.