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I'm glad to finally find someone who knows exactly what caused the housing bubble and subsequent crash. Could you explain it to me? I find the whole matter very

I'm glad to finally find someone who knows exactly what caused the housing bubble and subsequent crash. Could you explain it to me? I find the whole matter very confusing myself, although I've read a lot about it. So: low interest rates caused the housing bubble. Could you explain how that happened exactly?

Tuna-Fish 16y ago
It's somewhat more complicated than that. However, the interest rates staying far too low for far too long was a necessary, but not sufficient part of the bubble. Or in other words, pulling the interest rates back up to sane amounts the second the economy recovered from the worst slump would have turned the loan market from a borrower's market to a debtor's one, and prevented the bubble.
varjag 16y ago
The ever-lowering base interest rate made real estate acquisition (and refinancing) way more lucrative than traditional instruments like savings account. This outstanding stream of revenue turned the whole of financial industry with its powerful lobbying machine to twist as much out of it as it can, encouraging the stampede.
deleted 16y ago
[deleted]
lionhearted 16y ago
> I'm glad to finally find someone who knows exactly what caused the housing bubble and subsequent crash. Could you explain it to me? I find the whole matter very confusing myself, although I've read a lot about it. Yeah, it is a complicated topic. What did you want to know specifically, what were your questions? > So: low interest rates caused the housing bubble. Could you explain how that happened exactly? Low interest rates were a big part of the problem - the price of money got below the cost of inflation. That means borrowing as much as you can is profitable. Let's say your interest rate is 4%, but the rate of inflation is 5%. That means that all things being equal, your rents on a commercial property are increasing faster than you're paying in interest! That doesn't seem like a big difference to a layman, but the gap between 4% and 5% is huge. That's 20% on your money. In that kind of environment, it means if you borrow as much as you can, you turn bigger and bigger profits. This drives housing prices up. It also drives the stock market up. But the assets are artificially high because the money lending rates are artificially low, ie, set by the Federal Reserve. An arbitrage like this would be much less likely to happen over such a long period without the rates being set artificially low for political reasons, to make things look good when they weren't. And then you know the rest of the story after that. For the most straightforward, plain English explanations, I'd recommend Peter Schiff - he was correctly predicting the housing crash almost to the letter and getting mocked on news analysis programs for it. Here's a link to some of his clips from 2006 and 2007: http://www.youtube.com/watch?v=2I0QN-FYkpw http://www.youtube.com/watch?v=2I0QN-FYkpw He's got some free videos and wrote some books, check the clips above out - he's consistent with that message - and then check more of him out if you want to understand more. If you have any specific questions, I'll try to answer to the best of my ability.
- effn 16y ago
  Real mortgage interest rates did not go negative at any point during the housing bubble. > For the most straightforward, plain English explanations, I'd recommend Peter Schiff - he was correctly predicting the housing crash almost to the letter Yes, but his predictions after that has been rubbish, anyone who would take his investment advice would have lost a ton of money. You say we should take what Krugman says with a grain of salt since he's been wrong before. Doesn't that also apply to Schiff?
- anamax 16y ago
  > Low interest rates were a big part of the problem - the price of money got below the cost of inflation. Except that they didn't. They did get below the price of housing inflation, but that's in part due to lax lending standards, which were basically forced by regulators. Fannie and Freddie didn't help by lying about the quality of the loans in the pools that they were selling. Not only did that screw folks who bought those pools, it screwed up everyone's market risk evaluation because their lie hid the fact that a huge fraction of the loans were going to folks who didn't have a prayer of paying back. Yes, "everyone knew" that there were a lot of those loans, but the statistics, tainted by Fannie and Freddie's lies, said that things were a lot better than they actually were. Some folks thought that the stats were "optimistic", but few thought that they were as wrong as they actually were. After all, who'd have thought that a GSE would commit fraud.... FWIW, the senior execs at Fannie and Freddie during this time were prominent Dems, some of whom launched Obama. McCain actually tried to rein in Fannie and Freddie during this time, but got his teeth kicked in by Congressional Dems. (One could argue that McCain's efforts, in 2005/2006 were too little too late, but ....)
- cia_plant 16y ago
  I guess my question was very vague. Let me be more specific. When people talk about causes, they can mean a few different things. For example, if someone is crossing the street at a walk signal, and is hit by a drunk driver, we tend to say that the drunk driver caused the accident. The accident could have been prevented if the pedestrian had been more careful, perhaps, but he was generally justified in crossing at a walk signal. The driver, on the other hand, was doing something unexpected and dangerous. So in this sort of situation, we can point to a cause. Then again, there are other accidents where there is no single cause. If you ask what caused Chernobyl, you could answer that it was caused by bad reactor design; or by failing to follow safety protocols; or by running a dangerous experiment; and, from what I've read about the accident, all of these explanations would be somewhat correct. All of these actions were reckless, and the absence of any one of them could have prevented the accident. So with Chernobyl, there are many independent factors which collide in an unpredictable way to create a catastrophe. Yet again, there are systems like the weather. If you want to know why it's raining, you can point to particular things that happened recently - like moisture moving in from the pacific or what have you. Each event that occurs has some proximate causes. But overall, the weather is chaotic and unpredictable. There's not really any way to analyze it into overall causes - the best we can do, long term, is the ultimate forecase of the 'hippy dippy weatherman': 'the weather will continue to change, on and off, for a long, long time' So, for me, right now, the economy is pretty much like the weather. There are highs and lows, and each one has its particular characteristics, but I can't see an overall system to it. I'd love to have a level of understanding where it is more like the driving accident: I could point to the particular asshole who caused the mess. If that's not possible, I'd at least like to have a Chernobyl level of understanding, where I have some sense of what mistakes were made. So anyway, I guess I've read some pieces of the story from a few different sources, and they all give a fairly plausible story of how A preceded B, and ~A would have prevented B. Some of these are: deregulation, low interest rates, government interference in the housing market, bad modeling of risk on the part of finance firms and credit agencies, capitalism itself. I have a little bit of an understanding of each of these stories. But I'm still confused over which of these could be considered independent causes. For example, if the financiers somehow needed to find a place to put their money, then it may have been a consequence that they came up with risk models which drastically underestimated the risk of certain products. So, what I'd like to know is, how did low interest rates lead specifically to this housing-led finance bubble? Were the other factors coincidental, or forced? I hadn't ever heard that borrowing was actually below the rate of inflation - so that's very interesting to me. But then, why didn't the bankers just borrow money and put it into treasury bonds or the stock market? Why build up this house of cards with subprime mortgages and mortgage-backed securities and whatever else? Thanks for taking the time to answer my questions. I'll also look into Schiff later (I don't really like video, but I'll see if my library has one of his books).
RyanMcGreal 16y ago
This is my take: http://raisethehammer.org/blog/1111/the_finance_crisis_in_eight_painful_steps http://raisethehammer.org/blog/1111/the_finance_crisis_in_ei...
miked 16y ago
So: low interest rates caused the housing bubble. Could you explain how that happened exactly? Many things caused the housing bubble, but printing money (causing low interest rates) was a huge part of it. It works like this: when something becomes cheaper, more people purchase it. Interest payments are a huge part of the cost of buying a house. When they get a lot cheaper... People forgot that interest rates can't stay cheap forever. And when money gets expensive again, housing prices tank. This, BTW, is a great insider account by someone who was in the trenches. A confession from a home ownership advocate http://www.ft.com/cms/s/2/f64a9e36-9da3-11de-9f4a-00144feabdc0,dwp_uuid=a712eb94-dc2b-11da-890d-0000779e2340.html http://www.ft.com/cms/s/2/f64a9e36-9da3-11de-9f4a-00144feabd...
deleted 16y ago
[deleted]
cturner 16y ago
You might find this interesting: http://www.creditwritedowns.com/2008/12/confessions-of-an-austrian-economist.html http://www.creditwritedowns.com/2008/12/confessions-of-an-au... That blog in general deals with a lot of these issues.

Tuna-Fish 16y ago

It's somewhat more complicated than that. However, the interest rates staying far too low for far too long was a necessary, but not sufficient part of the bubble. Or in other words, pulling the interest rates back up to sane amounts the second the economy recovered from the worst slump would have turned the loan market from a borrower's market to a debtor's one, and prevented the bubble.

varjag 16y ago

The ever-lowering base interest rate made real estate acquisition (and refinancing) way more lucrative than traditional instruments like savings account. This outstanding stream of revenue turned the whole of financial industry with its powerful lobbying machine to twist as much out of it as it can, encouraging the stampede.

deleted 16y ago

[deleted]

lionhearted 16y ago

> I'm glad to finally find someone who knows exactly what caused the housing bubble and subsequent crash. Could you explain it to me? I find the whole matter very confusing myself, although I've read a lot about it. Yeah, it is a complicated topic. What did you want to know specifically, what were your questions? > So: low interest rates caused the housing bubble. Could you explain how that happened exactly? Low interest rates were a big part of the problem - the price of money got below the cost of inflation. That means borrowing as much as you can is profitable. Let's say your interest rate is 4%, but the rate of inflation is 5%. That means that all things being equal, your rents on a commercial property are increasing faster than you're paying in interest! That doesn't seem like a big difference to a layman, but the gap between 4% and 5% is huge. That's 20% on your money. In that kind of environment, it means if you borrow as much as you can, you turn bigger and bigger profits. This drives housing prices up. It also drives the stock market up. But the assets are artificially high because the money lending rates are artificially low, ie, set by the Federal Reserve. An arbitrage like this would be much less likely to happen over such a long period without the rates being set artificially low for political reasons, to make things look good when they weren't. And then you know the rest of the story after that. For the most straightforward, plain English explanations, I'd recommend Peter Schiff - he was correctly predicting the housing crash almost to the letter and getting mocked on news analysis programs for it. Here's a link to some of his clips from 2006 and 2007: http://www.youtube.com/watch?v=2I0QN-FYkpw http://www.youtube.com/watch?v=2I0QN-FYkpw He's got some free videos and wrote some books, check the clips above out - he's consistent with that message - and then check more of him out if you want to understand more. If you have any specific questions, I'll try to answer to the best of my ability.

effn 16y ago
Real mortgage interest rates did not go negative at any point during the housing bubble. > For the most straightforward, plain English explanations, I'd recommend Peter Schiff - he was correctly predicting the housing crash almost to the letter Yes, but his predictions after that has been rubbish, anyone who would take his investment advice would have lost a ton of money. You say we should take what Krugman says with a grain of salt since he's been wrong before. Doesn't that also apply to Schiff?
anamax 16y ago
> Low interest rates were a big part of the problem - the price of money got below the cost of inflation. Except that they didn't. They did get below the price of housing inflation, but that's in part due to lax lending standards, which were basically forced by regulators. Fannie and Freddie didn't help by lying about the quality of the loans in the pools that they were selling. Not only did that screw folks who bought those pools, it screwed up everyone's market risk evaluation because their lie hid the fact that a huge fraction of the loans were going to folks who didn't have a prayer of paying back. Yes, "everyone knew" that there were a lot of those loans, but the statistics, tainted by Fannie and Freddie's lies, said that things were a lot better than they actually were. Some folks thought that the stats were "optimistic", but few thought that they were as wrong as they actually were. After all, who'd have thought that a GSE would commit fraud.... FWIW, the senior execs at Fannie and Freddie during this time were prominent Dems, some of whom launched Obama. McCain actually tried to rein in Fannie and Freddie during this time, but got his teeth kicked in by Congressional Dems. (One could argue that McCain's efforts, in 2005/2006 were too little too late, but ....)
cia_plant 16y ago
I guess my question was very vague. Let me be more specific. When people talk about causes, they can mean a few different things. For example, if someone is crossing the street at a walk signal, and is hit by a drunk driver, we tend to say that the drunk driver caused the accident. The accident could have been prevented if the pedestrian had been more careful, perhaps, but he was generally justified in crossing at a walk signal. The driver, on the other hand, was doing something unexpected and dangerous. So in this sort of situation, we can point to a cause. Then again, there are other accidents where there is no single cause. If you ask what caused Chernobyl, you could answer that it was caused by bad reactor design; or by failing to follow safety protocols; or by running a dangerous experiment; and, from what I've read about the accident, all of these explanations would be somewhat correct. All of these actions were reckless, and the absence of any one of them could have prevented the accident. So with Chernobyl, there are many independent factors which collide in an unpredictable way to create a catastrophe. Yet again, there are systems like the weather. If you want to know why it's raining, you can point to particular things that happened recently - like moisture moving in from the pacific or what have you. Each event that occurs has some proximate causes. But overall, the weather is chaotic and unpredictable. There's not really any way to analyze it into overall causes - the best we can do, long term, is the ultimate forecase of the 'hippy dippy weatherman': 'the weather will continue to change, on and off, for a long, long time' So, for me, right now, the economy is pretty much like the weather. There are highs and lows, and each one has its particular characteristics, but I can't see an overall system to it. I'd love to have a level of understanding where it is more like the driving accident: I could point to the particular asshole who caused the mess. If that's not possible, I'd at least like to have a Chernobyl level of understanding, where I have some sense of what mistakes were made. So anyway, I guess I've read some pieces of the story from a few different sources, and they all give a fairly plausible story of how A preceded B, and ~A would have prevented B. Some of these are: deregulation, low interest rates, government interference in the housing market, bad modeling of risk on the part of finance firms and credit agencies, capitalism itself. I have a little bit of an understanding of each of these stories. But I'm still confused over which of these could be considered independent causes. For example, if the financiers somehow needed to find a place to put their money, then it may have been a consequence that they came up with risk models which drastically underestimated the risk of certain products. So, what I'd like to know is, how did low interest rates lead specifically to this housing-led finance bubble? Were the other factors coincidental, or forced? I hadn't ever heard that borrowing was actually below the rate of inflation - so that's very interesting to me. But then, why didn't the bankers just borrow money and put it into treasury bonds or the stock market? Why build up this house of cards with subprime mortgages and mortgage-backed securities and whatever else? Thanks for taking the time to answer my questions. I'll also look into Schiff later (I don't really like video, but I'll see if my library has one of his books).

RyanMcGreal 16y ago

This is my take: http://raisethehammer.org/blog/1111/the_finance_crisis_in_eight_painful_steps http://raisethehammer.org/blog/1111/the_finance_crisis_in_ei...

miked 16y ago

So: low interest rates caused the housing bubble. Could you explain how that happened exactly? Many things caused the housing bubble, but printing money (causing low interest rates) was a huge part of it. It works like this: when something becomes cheaper, more people purchase it. Interest payments are a huge part of the cost of buying a house. When they get a lot cheaper... People forgot that interest rates can't stay cheap forever. And when money gets expensive again, housing prices tank. This, BTW, is a great insider account by someone who was in the trenches. A confession from a home ownership advocate http://www.ft.com/cms/s/2/f64a9e36-9da3-11de-9f4a-00144feabdc0,dwp_uuid=a712eb94-dc2b-11da-890d-0000779e2340.html http://www.ft.com/cms/s/2/f64a9e36-9da3-11de-9f4a-00144feabd...

deleted 16y ago

[deleted]

cturner 16y ago

You might find this interesting: http://www.creditwritedowns.com/2008/12/confessions-of-an-austrian-economist.html http://www.creditwritedowns.com/2008/12/confessions-of-an-au... That blog in general deals with a lot of these issues.