3 ms·

Government policies, perhaps, though mostly in the sense that it creates the regulatory environment that finance works in. But government debt? Hardly. It may h

by scarmig 14y ago

Government policies, perhaps, though mostly in the sense that it creates the regulatory environment that finance works in. But government debt? Hardly. It may have been a headwind due to issues in Europe, but the core cause was overleveraged financial firms.

InclinedPlane 14y ago
Government policies are what created gargantuan financial firms who were in a position to overleverage themselves because they didn't think there was any risk in it. And low and behold governments bailed their asses out. In a more diversified market the companies that had overleveraged themselves would simply have gone under. More so, in a situation where the government had not put pressure on lenders to give loans to "sub-prime" borrowers, the whole mess would have never gotten so out of hand. Defaults would not have been so high, and real estate valuations would not have been so inflationary. Additionally, we've pretty much gotten over that problem. The problem now is a sovereign debt crisis, especially in Europe, and that has little to do with the market.
- scarmig 14y ago
  See "Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?" at http://research.stlouisfed.org/wp/2012/2012-005.pdf http://research.stlouisfed.org/wp/2012/2012-005.pdf Abstract: No.
  - hindsightbias 14y ago
    Don't bother. No amount of evidence can overcome these ideologues biases.
    - InclinedPlane 14y ago
      Yes, I'm sure. That's why I'm taking the time to read this paper. Go back to reddit please.
  - InclinedPlane 14y ago
    That's a pretty interesting paper but I'm not convinced that the evidence presented backs up its conclusions. One of the things they do is measure various parameters relative to 7 different affordable housing goal criteria (such as loans to census tracts with median income of 80% or less than the median income of the metropolitan area). However, the authors don't seem to address the problem of separating the effects of each different criteria. Also, the data is fairly limited (only from 3 years, in 2 states) and they make some pretty strident assumptions. For example, they can't seem to find a possible causal link between the state of the real estate market in the mid 2000s and an increase in mortgages spurred by affordable housing legislation several years prior to their 2004-2006 window. To me though it seems obvious that putting more people into the housing market, especially while it is experiencing a moderate boom would simply amplify that boom, as folks who managed to end up with some positive equity would work to maintain it, "flip" their properties, etc. As long as the market was always going up and people could generate positive equity just by sitting on their ass defaults were rare, because it would have been easy for people to sell their properties if they couldn't make payments in the future. Also, a lot of these mortgages were designed for flipping, having low payments early on before balloon payments later, making it easier to avoid default in the early years. On the other side of the equation, investors ate up securitized mortgages while the market was going up because they thought there was no risk. If people defaulted on their mortgages the properties would just be foreclosed on and since the property would inevitably have a higher market value than the mortgage, there was no downside for the investors. Which works just fine until the market reaches its breaking point and stalls out, after which people start going underwater on their mortgages, defaults increase, valuations fall, and everything goes to hell, as we saw. The paper addresses the proposition of affordable housing legislation causing an excess in sub-prime lending just prior to the peak of the real estate boom. However, it fails to address the more important and more basic question of whether affordable housing legislation injected an excess of "unqualified" buyers into the housing market, distorting the market and leading to a bigger boom and a bigger bust. However, as I mentioned, that whole mess (regardless of its cause) has only contributed a comparatively small amount to the much larger sovereign debt crisis that the world is facing now, which would take a lot of stretching to blame on the market.

by scarmig 14y ago

InclinedPlane 14y ago

Government policies are what created gargantuan financial firms who were in a position to overleverage themselves because they didn't think there was any risk in it. And low and behold governments bailed their asses out. In a more diversified market the companies that had overleveraged themselves would simply have gone under. More so, in a situation where the government had not put pressure on lenders to give loans to "sub-prime" borrowers, the whole mess would have never gotten so out of hand. Defaults would not have been so high, and real estate valuations would not have been so inflationary. Additionally, we've pretty much gotten over that problem. The problem now is a sovereign debt crisis, especially in Europe, and that has little to do with the market.

scarmig 14y ago
See "Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?" at http://research.stlouisfed.org/wp/2012/2012-005.pdf http://research.stlouisfed.org/wp/2012/2012-005.pdf Abstract: No.
- hindsightbias 14y ago
  Don't bother. No amount of evidence can overcome these ideologues biases.
  - InclinedPlane 14y ago
    Yes, I'm sure. That's why I'm taking the time to read this paper. Go back to reddit please.
- InclinedPlane 14y ago
  That's a pretty interesting paper but I'm not convinced that the evidence presented backs up its conclusions. One of the things they do is measure various parameters relative to 7 different affordable housing goal criteria (such as loans to census tracts with median income of 80% or less than the median income of the metropolitan area). However, the authors don't seem to address the problem of separating the effects of each different criteria. Also, the data is fairly limited (only from 3 years, in 2 states) and they make some pretty strident assumptions. For example, they can't seem to find a possible causal link between the state of the real estate market in the mid 2000s and an increase in mortgages spurred by affordable housing legislation several years prior to their 2004-2006 window. To me though it seems obvious that putting more people into the housing market, especially while it is experiencing a moderate boom would simply amplify that boom, as folks who managed to end up with some positive equity would work to maintain it, "flip" their properties, etc. As long as the market was always going up and people could generate positive equity just by sitting on their ass defaults were rare, because it would have been easy for people to sell their properties if they couldn't make payments in the future. Also, a lot of these mortgages were designed for flipping, having low payments early on before balloon payments later, making it easier to avoid default in the early years. On the other side of the equation, investors ate up securitized mortgages while the market was going up because they thought there was no risk. If people defaulted on their mortgages the properties would just be foreclosed on and since the property would inevitably have a higher market value than the mortgage, there was no downside for the investors. Which works just fine until the market reaches its breaking point and stalls out, after which people start going underwater on their mortgages, defaults increase, valuations fall, and everything goes to hell, as we saw. The paper addresses the proposition of affordable housing legislation causing an excess in sub-prime lending just prior to the peak of the real estate boom. However, it fails to address the more important and more basic question of whether affordable housing legislation injected an excess of "unqualified" buyers into the housing market, distorting the market and leading to a bigger boom and a bigger bust. However, as I mentioned, that whole mess (regardless of its cause) has only contributed a comparatively small amount to the much larger sovereign debt crisis that the world is facing now, which would take a lot of stretching to blame on the market.