August 13, 2012

AT WHICH POINT YOU JUST NEED TO LOOK AT WHAT TOOK THE PRESSURE OFF PRICES...:

Housing bubble? What housing bubble? : Meet Paul Willen, a Boston Fed economist preaching a bad-news gospel: We won't see the crash coming next time, either. (Leon Neyfakh, AUGUST 03, 2012, Boston Globe)

[Paul Willen, a research economist at the Federal Reserve Bank of Boston], moves through the world in a state of dismay and occasional fury at the fact that absolutely no one--not the media, not the public, and not his fellow economists--seems to understand the truth about what happened. Since 2008, Willen, a mortgage specialist, has pored over troves of data and emerged with a powerful, counterintuitive conclusion: that the real reason everything ended so badly wasn't adjustable rate loans, or government housing policy, or esoteric financial instruments. Rather, it was a single underlying assumption that almost everyone in the market, from bankers to home buyers, shared: that American house prices would continue to go up indefinitely.


Willen has spent the past four years trying to persuade people of what he sees in the data: that everyone in the drama acted perfectly rationally. Under the assumption that the real estate market would continue its steady rise, it made sense for families to buy homes they couldn't afford, and it made sense for bankers to buy up subprime mortgages. This belief --Willen thinks of it as a mass delusion--fueled an immense bubble that could not be reliably identified for what it was. [...]

Since 2008, Willen has been pressing his theory about the crisis in a series of academic papers and lectures. But while his job at the Fed gives him access to policy makers in the central bank, he has found himself firmly in the role of outsider in his own field. Critics say he underplays the extent to which the crisis was made more grave because of reckless decisions by lenders and bankers, and some suggest it's a cop-out--a way to spin the problem so that no one, especially the Fed, has to take any blame for what went wrong.

But if this theory excuses economic policy makers in the short term, in the bigger picture it attacks the very foundations of what they claim to do. Ultimately, Willen's argument can be seen as an indictment not of the players in the crisis, but of the field of economics, which he believes is fundamentally incapable of delivering the kind of insights and wisdom that some of its practitioners, as well as members of the public, believe it can.

"People think the bubble was driven by reckless underwriting," Willen said in an interview at the Boston Fed recently. "But the truth is the bubble was this thing that emerged kind of organically, and we don't really understand where it came from."

...which was killing immigration reform.  Removing tens of millions of prospective buyers was disastrous in itself, but it also exposed all the fraudulent activity that financial institutions had engaged in, hiding the real risk inherent in subprime mortgages.

Posted by at August 13, 2012 5:26 AM
  

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