- Over-promoting homeownership;
- Effect of financial crisis filtered into other countries, fed back into United States: declining dollars, faltering stock market, more financial failures (IB Bear Stearns);
- Last crisis, institutional framework changes: new home-loan banking system, private sector reforms (more professional), legislative, insuring banking system, SEC, … become models for similar institutions the world over;
- Today’s responses, far from enough at least in scale, merely quick fixes that fail to address the full scope of the problem;
- Short run: prompt and correct bail-outs;
- Long run: improve financial information infrastructure, extend the scope of financial market to cover wider array of economic risks, provide greater security to customers (create retail financial instruments).
2. Housing in History
- Home prices “rocket taking off” in the peak of 2006;
- Different paths, location counts, rate of decline inversely proportional to the speed of increase;
- Lowest price tier shows biggest boom and drop afterwards.
3. Bubble Trouble
- Social contagion, epidemics, “new era” stories;
- Alan Greenspan, acknowledged bubbles, but our models are far too simple; assumes independent rational thinking of individual;
- Feedback loops, amplified by the news media; price-story-price loop, price-economic activity-price loops; speculative bubbles actually caused by bubbles not fundamentals;
- Information cascades: disregard their own independent, individually collected information, act instead on general information, squelch their own information, then the quality of group information declines;
- Rating agencies persisted in giving AAAs, regulators failed to rein in aggressive lending, show no recognition of the boom being the cause of the risks;
America, from its inception, was a speculation.
To a substantial extent, we no longer admired those who were merely hard workers. To be truly revered, one had to be a smart investor as well.
- Home prices, unlike stock price, move exceptionally smoothly from time to time.
4. The Real Estate Myth
- Urban patriotism: Californians proud of their pleasant weather and beautiful scenery;
- Demand for large, walkable urban centers, promote homeownership, restricting new construction is politically fragile.
5. A Bailout by Any Other Name
- Bailout, Fed offering something unavailable in the marketplace, taking risk by investing in securities that others would not touch;
- Taxpayers paying for this bailout, tax rebate checks sent to low-income taxpayers, taxpayers paying for the boon of raising loan limits: the losers are disproportionately those people who have prudently been staying out of the housing market bubble;
- Why necessary: government strive to prevent misfortunes that will create long-standing distrust in economic institutions;
- Benjamin Friedman: when people see encouraging prospects of the future, they are better able to work together constructively, supporting democratic principle and political and social liberalization;
- Systemic effects: financial losses vs. real losses, drop in home values vs. destroy public confidence and the rate of output in the economy falls;
- Write down the principals of mortgage loans, in the interest of both borrowers and lenders, keep homeowners in place;
6. The Promise of Financial Democracy
- Fee-only, impartial, useful, comprehensive financial advisers, subsidized by reformed tax policy, especially for low-income people;
- Designing standard contracts including prudent default option, since people take whatever is offered first or seems conventional; civil law notary;
- Information disclosure; subsidize creation of enlarged pool of data;
- New system of unit measurement: UF made Chile the most inflation-aware country in the world; Modigliani-Cohn effect: nominal interest rates were high even though real rates were not; cutting wages in Great Depression; home prices doesn’t basically change over one-hundred years;
- Derivatives and house futures market: potential to tame speculative bubbles;
- Other new markets: GDP indexed debts, hedge national economic risks;
- Continuous-workout mortgages: like regular checkups and preventive care, people pay in advance for the right to bail out, reduce moral hazard by writing into not only borrowers’ income but others’ earning ability;
- Home equity insurance: prevent homeowners from falling into negative positions, eliminate panic selling, no moral hazard if written on aggregate home value of a city;