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It also drove house prices crazy, a process that continues to this day and has ironically made housing permanently unaffordable for huge numbers of people. The

by api 8y ago

It also drove house prices crazy, a process that continues to this day and has ironically made housing permanently unaffordable for huge numbers of people. The housing bubble created a "new normal" for house prices that's frankly absurd when considered as a fraction of median income. It's very similar to the story with student loans. Easy student loans have driven tuition costs as crazy as housing costs.

petra 8y ago
Wasn't this a predicted result of offering cheap loans? And if so,why was this the route chosen?
- api 8y ago
  Americans (even some center-left ones) hate the idea of directly supporting anything, so cheap loans were used as a substitute for directly operating and funding public colleges. Same with housing. Directly supporting people is "socialism," a handout, and is seen as supporting laziness and vice. A loan must be paid back, which allows many Americans to view it as something encouraging responsibility and virtue. It all comes down to the puritan work ethic. The problem is that government backed loans are just an indirect way of giving welfare, and a monstrously perverse and inefficient way to boot. It drives price inflation which gets captured by the vendors of the products/services in question (existing home owners, builders, universities, etc.) instead of those you're trying to help and it creates debt bubbles that represent a danger to the overall health of the economy. Overall it's probably worse than doing nothing due to the price inflation it generates. Housing was reasonable across much of the USA prior to the 'oughts. The housing bubble destroyed home affordability, an effect which as I said persists to this day.
  - OscarCunningham 8y ago
    Wouldn't directly supporting people also produce price inflation?
    - pitaj 8y ago
      Yep, what the parent commenter didn't say was that pumping money into any system almost always results in prices going wayyy up to absorb the new demand. This happens regardless or whether it's loans or direct subsidies.
      - rifung 8y ago
        I believe the way laws generally deal with this is to only allow subsidies when the price is under some cap. Sadly we (or the US) don't do this for education it would seem
    - deleted 8y ago
      [deleted]
smogcutter 8y ago
A similar thing is happening with auto loans. There's a ton of bad car debt out there, and easy credit has inflated car prices and (I believe) helped disincentivize auto makers from building cars that are actually affordable. There's no market for simple and cheap if you can get something nicer on credit and not look poor. There's a reason the Dodge Journey retails for 4k+ off msrp. With the inflated mspr they can get the bank to write a bigger loan. That way you can buy a journey at a "discount" with room to roll your existing bad loan into a new, even worse one.
- taurath 8y ago
  To be fair though, safety regulations requiring heavier vehicles on top of requirements for better fuel economies have cut the margins a bit, but the prices have not raised much if at all. The 1995 Honda Civic LX was $14,160 in MSRP, which is ~$22k in 2018 dollars. There are plenty of vehicles for less than that. You might be referring to the higher margins that SUVs get, which are getting more and more popular in the US... but TBH I'm not sure where you get the idea that car prices have been inflated.
  - smogcutter 8y ago
    This got me to dig into historical prices a little, and turns out I was even more wrong than that. Looks like car prices were pegged to inflation until about 1997, where they level off while overall CPI keeps growing: https://fred.stlouisfed.org/series/CPIAUCNS https://fred.stlouisfed.org/series/CPIAUCNS https://fred.stlouisfed.org/series/CUUR0000SETA01?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=categories https://fred.stlouisfed.org/series/CUUR0000SETA01?utm_source... That said, loan terms are lengthening and subprime loans are a large and growing part of the market. That has to be buttressing prices. I really can't back this up, but my suspicion is that over the long term, available credit has helped discourage auto makers from simply making cheaper cars. Today you can buy a cheap appliance computer for a price that would've been unimaginable in 1995. And you can buy a cheap appliance car... for about the same price as in 1995. Obviously the two markets don't work the same way, but there's still something odd about that.

by api 8y ago

petra 8y ago

Wasn't this a predicted result of offering cheap loans? And if so,why was this the route chosen?

api 8y ago
Americans (even some center-left ones) hate the idea of directly supporting anything, so cheap loans were used as a substitute for directly operating and funding public colleges. Same with housing. Directly supporting people is "socialism," a handout, and is seen as supporting laziness and vice. A loan must be paid back, which allows many Americans to view it as something encouraging responsibility and virtue. It all comes down to the puritan work ethic. The problem is that government backed loans are just an indirect way of giving welfare, and a monstrously perverse and inefficient way to boot. It drives price inflation which gets captured by the vendors of the products/services in question (existing home owners, builders, universities, etc.) instead of those you're trying to help and it creates debt bubbles that represent a danger to the overall health of the economy. Overall it's probably worse than doing nothing due to the price inflation it generates. Housing was reasonable across much of the USA prior to the 'oughts. The housing bubble destroyed home affordability, an effect which as I said persists to this day.
- OscarCunningham 8y ago
  Wouldn't directly supporting people also produce price inflation?
  - pitaj 8y ago
    Yep, what the parent commenter didn't say was that pumping money into any system almost always results in prices going wayyy up to absorb the new demand. This happens regardless or whether it's loans or direct subsidies.
    - rifung 8y ago
      I believe the way laws generally deal with this is to only allow subsidies when the price is under some cap. Sadly we (or the US) don't do this for education it would seem
  - deleted 8y ago
    [deleted]

smogcutter 8y ago

A similar thing is happening with auto loans. There's a ton of bad car debt out there, and easy credit has inflated car prices and (I believe) helped disincentivize auto makers from building cars that are actually affordable. There's no market for simple and cheap if you can get something nicer on credit and not look poor. There's a reason the Dodge Journey retails for 4k+ off msrp. With the inflated mspr they can get the bank to write a bigger loan. That way you can buy a journey at a "discount" with room to roll your existing bad loan into a new, even worse one.

taurath 8y ago
To be fair though, safety regulations requiring heavier vehicles on top of requirements for better fuel economies have cut the margins a bit, but the prices have not raised much if at all. The 1995 Honda Civic LX was $14,160 in MSRP, which is ~$22k in 2018 dollars. There are plenty of vehicles for less than that. You might be referring to the higher margins that SUVs get, which are getting more and more popular in the US... but TBH I'm not sure where you get the idea that car prices have been inflated.
- smogcutter 8y ago
  This got me to dig into historical prices a little, and turns out I was even more wrong than that. Looks like car prices were pegged to inflation until about 1997, where they level off while overall CPI keeps growing: https://fred.stlouisfed.org/series/CPIAUCNS https://fred.stlouisfed.org/series/CPIAUCNS https://fred.stlouisfed.org/series/CUUR0000SETA01?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=categories https://fred.stlouisfed.org/series/CUUR0000SETA01?utm_source... That said, loan terms are lengthening and subprime loans are a large and growing part of the market. That has to be buttressing prices. I really can't back this up, but my suspicion is that over the long term, available credit has helped discourage auto makers from simply making cheaper cars. Today you can buy a cheap appliance computer for a price that would've been unimaginable in 1995. And you can buy a cheap appliance car... for about the same price as in 1995. Obviously the two markets don't work the same way, but there's still something odd about that.