Who Saw the Housing Bubble Coming?

Bruce Bartlett at Forbes makes some good points and places a lot of the blame on Greenspan for dismissing the problem.

Federal Reserve Chairman Alan Greenspan first addressed the question of a housing bubble in testimony before the Joint Economic Committee on April 17, 2002. He dismissed the idea--or, for that matter, any comparison to the stock market, which had recently gone through a high-tech bubble--on the grounds that housing was different because of substantial transaction costs and more limited opportunities for speculation.

Greenspan also argued that there really wasn't a single national market for housing, but rather a collection of many local markets. Even if a bubble emerged in one market, he said, there was no reason to think it would spill over into other markets.

But Bartlett also misplaces the blame. I wrote him...

Bruce,

You make it sound as if the collapse of the housing bubble was in and of itself the reason for the global economic problems. That’s a little too simple.

I knew there was a housing bubble because my son was shopping for a house a few years ago and prices were ridiculous. He bought a house with a conventional mortgage and 20% down and he’s fine.

If housing prices decline when buyers are forced to put 20% down, that would not lead to the current crisis.

If housing process decline and homebuyers have fixed rate mortgages that don’t go up even as values go down, that would not lead to the current crisis.

If housing prices decline when home buyers have adequate income to afford their fixed rate mortgages that would not lead to the current crisis.

If housing prices decline and defaults rates stay within historical limits, that would not lead to the current crisis.

If housing prices decline and large numbers of people walk away from their mortgages because they were not required to put any equity into their homes and their income is inadequate, then we have a problem because we don’t know what the value of those mortgages is worth. So we don’t know what the values of the mortgage backed securities are worth. And when we don’t know what something is worth, we are not going to be able to sell it if we need to raise cash. And when we have billions of dollars of securities on our books whose values won’t be known for years we have a global banking crisis.

So how did we get here? The housing bubble did not create itself; it was created as a byproduct of a policy that said that owning a house was good. And that not being able to afford a house should not be an impediment. And when the Feds decided that the banks had better be able to prove that they were lending a large percent of their mortgage money to poor people they got the response they were looking for: reduced standards. No money down, low teaser rates on adjustable rate mortgages, no confirmation of income, no confirmation of residence … in effect the liar’s mortgage.

And once we relax standards for some, we must relax standards for all. And that led to flippers and all sort of abuse where people bought multiple houses thinking that they could fix them up and sell them and make a fortune.

And all these mortgages could then be shoveled out the back door via Fannie and Freddie and sold to a gullible public reassured by the Godlike Greenspan, with Chris Dodd and Barney Frank running interference for Fannie and Freddie and Raines who testified that a leverage of 30 to 1 was too conservative; let’s shoot for 50 to 1.

But the collapse came on Bush’s watch so he’s the fall guy. The housing price decline led to a whole row of dominoes falling. The thing that frightens me is that we have the people who started this mess still in charge. And they want to do it again! Their latest scheme is to offer sub-prime auto loans so that people who can’t afford it will buy new cars. That is so stupid it makes my hair hurt. It seems the lesson was not learned.