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It would probably be more accurate to call it a subprime mortgage bubble. Those were the assets that were significantly over-priced. Or one could argue that i
by aeternum 5y ago
It would probably be more accurate to call it a subprime mortgage bubble.
Those were the assets that were significantly over-priced. Or one could argue that in '07 they were correctly priced given the questionable assumption that home values would only increase.
Home values themselves were high but definitely not in bubble territory. It was the derivatives that amplified those high home values. Specifically mortgages that couldn't be paid unless home values continued to increase. That kind of asset is very bubbly, an asset that only has value under a certain transient conditions, and the rating agencies marked them as relatively safe.
- jmole 5y agono one would have called it a bubble if it didn't pop. the pop came from the supply side, tons of mortgage companies selling now-cheap houses trying to claw back their money from bad loans. they patched the hole though, and now mortgages are larger than ever. great news for the banks and existing homeowners, bad news for anyone else.
- danaris 5y agoBut it was guaranteed to pop, because of the fundamental unsoundness of it. Like aeternum said, it was only viable as long as prices kept increasing. Any kind of shock to the system would cause a wave of defaults. And because of the bundling and spreading out of the CDOs based on these unsound mortgages, it essentially infected the entire system, meaning that that wave of defaults wouldn't just affect the real estate lending sector. So, sure, in an imaginary world where house prices could monotonically increase forever, we could choose not to call this a bubble. But it really is just that: imaginary.