E Yes There WAS A Housing Bubble

Yes, Sumner is correct that the Great Recession, Fed tight money, etc., made the housing crash worse. That is the great contribution of Market Monetarists to the debate. Tightening the money supply, which in one instance took the form of the commercial paper market decaying, took away business credit, which caused massive layoffs. The CP market financed subprime mortgages and it was ruined as the last chart below shows. That tightening took away HELOC's which added to the tight money situation. HELOC frenzy was a part of the housing bubble. Even a Market Monetarist, Marcus Nunez, understood that the housing bubble was related to the Great Recession through HELOCs gone wild and then curbed. And the Fed was culpable as banks started taking away HELOC lines of credit.

Nominal GDP was falling. But to say there was no bubble ignores the toxic loans, the pay option arms, the loans that could not be paid back the day they were written. To say there was no bubble ignores the ability of homeless people to get loans during that time. No-credit-check housing is a bubble!

In the bubble and pre bubble, home ownership went from low/mid 60's to high 60's as a percentage of the population, as the following chart shows. The bubble was in who owned the homes and their ability to pay. Sumner is rewriting history, and he does not need to do so to prove NGDP declined. It simply is not necessary for him to do so.

Ownership skyrocketed in the last decade before falling back to earth.

Collateral mortages are helping keep the Canadian housing bubble going. They are mortgages that allow lending to the borrower without the need to refinance. They are risky, bubblish loans. Homeownership rates among young people in Canada between the ages of 20 and 34 are below 45 percent! That could be a bad sign unless foreigners take up the slack. 

The UK is experiencing a comeback of risky loans. These nations are maintaining their housing value in many cases by really risky lending. They are markets in jeopardy. Economic shocks could prove damaging to these markets. The control of inventory may determine if house prices stagnate and avoid a crash. Certainly house builders have cut back on production in the USA and this is most likely the world over. This was not the case in the last decade's great housing bubble in the USA.

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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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William K. 1 year ago Member's comment

Certainly the irresponsible issuing of loans that could not be repaid contributed to the ultimate collapse. And the bundling of bad loans, selling them as investments, added a lot of fuel.

Anastasija Janevska 1 year ago Member's comment

What would have been the better course of action, William K.?

William K. 1 year ago Member's comment

The better path, for starters, would have been through much tighter regulation of the mortgage industry, including NOT rescuing the loan companies that made loans to those obviously unable to pay them back. Then, some sort of control on the bundling of mortgages and selling them as securities. Probably full disclosure for a start.

Of course, about the same time, gasoline prices shot out of sight due to speculators buying petroleum futures on credit. preventing speculation with borrowed money could have dampened that fire a bit.

Gary Anderson 1 year ago Author's comment

Yes William. The government did not follow the law. The law of 1989 to resolve the S&L crisis clearly was for companies to be punished if they loaned money to people who could not reasonably pay it back. The FIRREA bill was added to the CRA law and while most explanations of the law leave it out, one of the reasons it was passed was to give the government power to investigate bad loans made by unscrupulous lenders. It was eventially used in the Great Recession, but not at first. https://www.thebalance.com/what-is-firrea-3305839 Needless to say, banks and politicians owned by banks do not like this law.

In the Great Recession, the loans were bundled and risk applied to those loans was mispriced from the beginning, and I believe the Fed and the BIS were up to their eyeballs in permitting this mispricing of risk. When I first came to Talkmarkets I wrote a few articles about this subject.

BreakingBad News 1 year ago Member's comment

Certainly makes sense.