Fannie Mae and Freddie Mac guaranteed a huge portion of the loans, meaning the banks were really risking very little.
So, combine Fannie and Freddie guaranteeing against losses, and add in the really stupid, but widespread (nearly universal), operating theory that housing prices would continue to rise indefinitely, only slowing in rate of ascent, and never fall and you get a whole industry and their customers speculating beyond good sense in order to get their bucket into the waterfall of easy money. It wasn't just poor people with questionable credit getting loans beyond their means. Well off people with savings, good jobs, and great credit and everyone type in between were buying houses that were larger, more expensive or even 2nd and 3rd homes they could not afford if any sort of hiccup in their finances or the market occurred. Banks gave the loans because they employ people and their shareholders are people and the majority of people in the country were operating on a flawed, illogical, and unrealistically optimistic view of the market.
A painful, extremely so, wake-up call came and would have cured the mania for a few generations, but the government stepped in with the bailout morphine and took all the pain away (for the execs and investors anyway), basically ensuring that very soon we will again suffer from the same problem...student loans? housing again?
probably both, student loans first, then housing/banking.
The banks came out very nicely in the end. The big investors and the executives did anyway. We, the taxpayer, got the shaft and a smaller number of even bigger banks to bail out the next time around. Regional and local banks were, and are, doing quite well throughout this whole deal because they did not have the luxury, ability, and stupidity to drive off the cliff by giving loans to people for homes they couldn't afford without a proof of job, income or credit worthiness and then compounding it by bundling and selling mortgage backed securities.
I disagreed with the notion of an ever-rising market, seeing the parallel between the attitude of "there is no way the market will go down" and the attitude of speculators in the late 1920's that I learned about in high school history. I read an article in Fortune magazine in 2002 that denounced the notion of a housing bubble and its impending implosion. My takeaway from that reading was that it was 100 percent certain that within 5 years the housing market would suffer a correction. Attitudes of too many people were too similar to the attitude of the speculators of the late 1920s that paved the way for the Great Depression in that people were drunk with the illusion that the sky was the limit and that the only direction was up, completely forgetting that, by its very nature, investing is taking a risk of losing their money. The greater the return on investment, the greater the risk. Period. When the speculation is done with borrowed money, the implosion is exponentially worse.
The premise of the article was that there was nothing in the foreseeable future that would drastically curb speculative investment in the housing market. Skip ahead five or six years, throw a little 4 buck a gallon gasoline, the attendant increase in the cost of everything remotely related to the use of oil (everything shipped, produced using electricity, produced using something shipped, using an oil based raw material...so...everything except things made by the Amish and shipped by Amish sailing ship or buggy) and a law increasing the minimum payments on credit card debt while simultaneously moving the credit card interest rate cap significantly and... Alakazam! a drastic drop in disposable income and thus speculative investment in the housing market. Evaporated stock portfolios, tight credit, lost jobs, rampant foreclosures and other credit defaults, the dominoes began to fall.
Paying attention and having read, understood and disagreed with a poo-pooing of a housing bubble burst in Fortune magazine (April 1, 2002, Is Housing the Next Bubble?)
· 6 years ago