What caused the housing bubble? Or should I ask.....

[Tansy_Gold]

why caused the housing bubble?

What was the reason for the government -- and booooosh personally -- to suggest lowering credit standards for mortgages? Existing standards had been good for 40 years or more, from the end of WW2 through the baby boom years, and up until about 2000. What changed then?

I contend, as I have for some time, that the housing bubble was a result, not a cause, and that until we look at the REAL cause and make an attempt to fix it, we will get nowhere.

I used to live in Buckeye, Arizona. Up until about 2000, Buckeye was a sleepy little rural town on the far western fringe of the Phoenix metro area. It was a community of cotton farmers and a few cattle ranchers. Good ol' boys whose families had settled the Buckeye Valley in the 1880s, mostly from the state of Ohio (hence the name Buckeye). They liked their little one-main-street town, even though it was dying on the vine. The construction of Interstate 10 going from Phoenix to LA and I-8 going to San Diego had killed the traffic along Highway 85 that ran through Buckeye.

By 2000 there were few retail businesses in Buckeye, no decent supermarket, no jobs other than the huge prison complex 15 miles or so south of town.

But along about 2000, the developers who had bought thousands of acres of virgin desert along I-10 north of Buckeye began developing that land. They shut down our little two-lane Yuma Road and over the course of a year widened it to four-to-six lanes. They added an interchange on I-10. They put in a golf course and started construction on two major shopping areas. Then the houses went in. Hundreds of them. Thousands of them.

And my first question was, where are these people going to work? Are they all going to commute to Phoenix?

Beginning with NAFTA and WTO and GATT and all that other globalization alphabet soup, jobs were leaving the U.S. Profits were staying with the stockholders, but jobs were disappearing. That meant consumers' incomes were disappearing. If consumers had no incomes, they wouldn't buy the stuff that was now being made so cheaply in China and Bangladesh and Vietnam and Honduras. How to create income -- or at least spending power -- without bringing back jobs? Why, create cheap credit!

The credit card come-ons were one way. Get people to borrow against their futures so they can buy cheap vacations, cheap this, cheap that.

But credit cards need to be paid back on a regular basis. The consumer-based economy needed more than credit cards. It needed a big boost. So what's the single biggest expenditure most people make? A house. A new house means new furniture, new appliances, new everything -- most of which will be manufactured in one of the Chinese or Mexican sweatshops. And if home ownership is promoted right, the prices/values of homes will go up. People will be able to borrow against the "equity" in their home and continue to drive the economy even without jobs! Wow! Money from nothing!

People couldn't pay their mortgages because they didn't have jobs. As more and more and more jobs disappeared from the economy -- in a downward spiral once it began -- more people couldn't pay their mortgages.

It was the greed of the haves, the overwhelming obsession with more more more more more more more, that drove jobs out of this country and drove the housing market into bubble status. It wasn't the people who bought homes on bait-and-switch mortgages; it was the greedy brokers who saw SUCKER tattooed on EVERY buyer's forehead.

I watched the houses grow like mushrooms in Buckeye. I listened to people brag about buying a home in January for $150K and selling it in February for $200K.

I sold my house in Buckeye in February 2006, after my husband's death, and moved to Apache Junction, in the far east fringes of the Phoenix metro area. The guy who bought my house was self-employed as a remodeling contractor. He paid $340K for the house, with no cash down; a second mortgage of $70K was the down payment, and he borrowed additional money later to make some repairs and remodeling.

As the housing market dived in 2006 and 2007, his income also dived. By January 2008, the house was sold at foreclosure auction for $252K.

By May 2008, it was listed at $196K.

By August 2008, it was listed at $156K

Right now it's listed at $125,600.

From $340,000 to $125,000 in less than three years.

I kid you not.

Was it ever really worth $340,000? No, it wasn't. Neither was the place I bought. But it was a fair trade at the time and I'm happy where I am.

But I think it's unfair to blame the current crisis on the housing bubble. Something caused the housing bubble, and it wasn't something as stupid and worthless and useless as tulip mania. It was a determined and coordinated effort on the part of certain greedy individuals to milk the working classes without actually giving them work.

Henry Ford knew it -- if you don't pay people, they won't buy your product. Our current crop of shruggers didn't learn that lesson.

Of course, if they really ARE shruggers and I'm not just :tinfoilhat: ing it to extremes, then this is exactly the kind of world they wanted, and they are the last people we can turn to in hopes of fixing the problem.



Tansy Gold

[dkf]

1. There was incentive on both sides.

Realtors and Mortgage brokers made money by doing the deal.

Buyers were motivated by their desire to speculate in real estate. They knew they couldn't afford it, but they never intended to be able to do it on their own. They depended on ever increasing home values to make it work.

Banks also depended on increasing home values because they didn't think the buyers could do it on their own either.

[no_hypocrisy]

3. Not only did home prices increase via speculation, some properties

had their values improperly inflated to increase the amount of interest and points paid with the mortgages. Not to mention consumers could tap more equity in their home loans with an inflated value of their homes. Nobody was complaining at the time land values were treated as corporate stock that kept going up.

[dkf]

5. Yes. Everyone was happy, just like everyone was happy with

the stock market one year ago.

At least with the stock market, you don't lose more than you are worth unless you are crazy on margin.

[Democrats_win]

2. The road to a second bush term required a housing bubble.

The whole thing was about getting bush "elected" to a second term. Don't forget the importance of this because his father didn't get a second term. Don't forget that with bush, EVERYTHING is political.

Greenspan lowered interest rates to nearly 0%. Then banks would only make loans with adjustable rates. For banks money down didn't matter as long as they had adjustable rates. With such low rates, people could "afford" much more expensive homes. With people buying homes, the prices skyrocketed. The housing boom began and people started working in the housing industry following the dotcom bubble burst and 9/11. bush was re-"elected."

Now we pay for Greenspan lowering interest rates to an unnaturally low level.

There were other problems such as bushco lowering the amount of capital banks had to have. Whoever bundled mortgages also caused part of the problem. There was a lot of money available because of it, but this took the responsibility of making good loans out of the hands of banks. All they cared about was maning a loan, any loan. Bad loans. The end.

[dkf]

6. Bush ran on the war, not the economy.

The economy never was any good under Bush anyway.

[chalky]

8. Bush may have run on the war, but if the reality of how shaky the economy was

had been exposed, he would never have been elected. Take this election cycle for example. The double digits for Obama didn't start until the market hit the crapper. People might "tsk" over the ongoing loss of life happening in "some other place", but hit them where they REALLY live--in their pocketbook--and they'll turn on you like a junkyard dog.

[Raster]

10. DING! DING! DING! If you're gonna throw a war--no, make that TWO wars--and you wanna cut taxes

at the same time, you've got to have a damned good gimmick to make the economy look healthy, which it was not. What I find terribly unsettling is good ol' Alan Greenspan talking about "irrational exuberance" before Iraq and the housing bubble and then nothing after the invasion.

In short, to answer the OP's question: the housing bubble was a manufactured phenomenon to hide how bad the economy really was. It as also designed to get bush* and black-hearted cheney* "elected" in 2004.

[dkf]

11. You really think these guys are that smart?

I can't give them that much credit myself.

[Raster]

12. bush* and cheney* aren't that smart, but the guys that pull their strings certainly are.

And If I may say so, you've just hit on the perfect alibi for bush*. No one wants to attribute any of his nefarious actions to actually planning and execution because no one can picture bush* as that smart. AND THEY'RE RIGHT! He is the perfect patsy. Perfect. And what an iron-clad alibi--a shit-for-brains dumbfuck.

[chalky]

13. Bush? No. Cheney? Probably. Rove? HELL YEAH. n/t

[Tansy_Gold]

20. No, not at all. Not Rove. Not Cheney.

The people who were behind this were very careful to remain invisible. They don't want the political spotlight -- they want the REAL power.

Rove and Cheney and their ilk may make millions, even hundreds of millions, but the people who engineered this are making tens of billions of dollars off this. And they are doing it in a way that has given the power to DEMAND that the government give them more.

Rove isn't calling the shots on this. Neither is Grover Norquist.

But someone is.




and it ain't


Tansy Gold

[Raster]

22. DING!

[Cresent City Kid]

23. DING DING indeed

Manufacturing had lost its dominance in our economy. To sweep the effects of supply-side under the rug, they found the last pile of cash left to be exploited: our homes.

[Raster]

25. We regular, average, ordinary Americans are poor unwitting victims of financial vampires.

They feed on us, our productivity, our life savings, our credit. They even feed on our children via the Military-Industrial Complex. Our relationship with the uber-rich is not symbiotic. It's parasitical.

[Warpy]

4. What causes bubbles, period?

It's usually a combination of speculation and fear. People with money saw housing rising a modest amount every year and started to buy it up as investment. That took housing off the market and drove up demand, forcing prices higher. People who needed someplace to live jumped in, paying far more than a place was worth simply because prices had been rising so fast they were fearful they'd be shut out of the market. Speculators bought even more since it was a "can't lose" investment.

The bubble burst when creative financing kicked in and people, both speculators and families, could no longer pay the balloon payments and went into foreclosure. With more housing dumped on the market than there was demand, prices started to edge down. That alarmed speculators, especially, and they started to dump all their housing on the market at once. That's how the bubble burst.

[Joanne98]

7. EXCELLENT! K&R!

[soothsayer]

9. go watch 'money as debt' for free on the web, and you'll learn

how our ponzi scheme of an economy needs debt (for you and the rest of the world) in order to create wealth (for others). then you'll understand why these bubbles are created.

[bluesmail]

14. Probably exactly how it happened.

:tinfoilhat:

[Festivito]

15. Borrowing to buy our goods sold in US.

MY QUICKLY PUT TOGETHER VIEW: China, Brazil, ... made our goods,
THEN STEP BY STEP:

1. they would send us goods,
2. they would get dollars,
   • they can't use dollars,
   • they buy businesses,
   • they can run only so many businesses,
3. they can buy mortgage bundles,
   • mortgage bundles look good, seem insured,
   • BACK TO a stock market drop early in Bush term,
   • housing looks like a better investment to Americans than stocks,
   • personal stock money, what's left, goes to personal housing as investment,
   • NOW ONE PART OF BUBBLE IS STARTED,
4. China, Brazil, ... keep making goods,
   • we've shipped our jobs overseas,
   • still goods from cheap countries remain cheap,
   • we keep buying cheap imports,
   • China and Brazil get more dollars,
   • China and Brazil NEED MORE MORTGAGE BUNDLES,
5. Bush admin needs more economy numbers and relax rules,
   • More mortgage bundles are sold,
   • housing starts are up since banks have need to loan,
   • Bush admin numbers look good,
6. STILL MORE MONEY FOR CHINA AND BRAZIL IS NEEDED,
   • Companies begin to loan up to 120%, and do not even check employment,
   • Why check it, the house value will rise of course,
   • they can sell it later and pay back the loan THEY BELIEVE,
7. THERE IS NOTHING TO BACK THE BORROWED DOLLARS EXCEPT
   A BUBBLE OF HOUSING VALUE, HOUSING PRICES, NOT THE VALUE OF HOUSING.

The bubble is cheap goods, funding inflated home prices, bought on a ponzi scheme of inter-country credit.

NOTE: There are other involved countries than just China and Brazil.

[nichomachus]

16. The seeds of the bubble

were sown when they made credit way too easy to obtain.

When I bought my first car back in 1964, I had to go to the bank and talk to a bank officer. They did everything but take a blood test. They scrutinized me more than my HMO doctor does now. I was lucky to get the loan.

When I bought my first house, again I had to talk to an officer of the bank. The woman I dealt with at the bank personally came out and inspected the house -- pointing out work that needed to be done if the bank was to approve the loan. They also personally called the guy I worked for and checked even more stuff than they did for the car.

Back then, only very well-off people had credit cards. A credit card was a sign you had "made it." A friend's grandfather had about five different credit cards and I was impressed as all get out. You might have had a store charge account, but a credit card that you could use in different places was a real sign of financial success.

Now, they give credit cards to unemployed college freshmen, people can get mortgages without showing proof of any income, and car dealers will lend you money no matter how bad your payment history is. (I'm talking about three months ago, not now.)

Not only that, they enticed and badgered people into borrowing. I, like everyone else, was bombarded with credit card offers, checks to borrow against my credit cards, and enticements to take out an equity line on my house. They spent a lot of effort and money to convince people that this was the smart thing to do. And, people who had never been taught the basics of economics fell for it.

I blame the people who should have known better -- the bankers and lenders. They were the gatekeepers of the system. If an individual borrowed more than he could afford, then he is responsible for his own mess. But the collapse of the system liues squarely at the feet of the gatekeepers -- the bankers.

[Tansy_Gold]

17. Yes, but the question is WHY did they make credit so easy?

What was in it for them?

1. In order to make easy credit "work," there had to be something to buy. cheap plastic crap wasn't generating enough profit; there had to be something else. That's why the housing market took off so explosively in 2000-2002. It was a perfect vehicle for "creating" wealth.

2. the Enron debacle (late 2000) illustrated what would happen if a derivatives bubble bust. They knew the housing bubble, as it morphed further into the derivatives bubble, would burst eventually. But the housing bubble allowed them to get huge sums of money out a lot faster.

Who are "they"? Not Rove and Norquist, not Rumsfeld or the rest of the political operatives. The real culprits are the "smart guys," the hedge fund operators, the investment bankers, etc., etc., etc. They bought and paid for the politicians, and they did it with our money. First they took our money, then they took our jobs, then they took our savings, then they took our futures, and now they're taking our country.


Tansy Gold, who didn't pick this screen name unintentionally

[nichomachus]

18. Why? Because debt makes people slaves.

That was easy. When someone is deep in debt with huge monthly payments, they can't tell their boss to take the job and shove it. That's why, for all their protestations to the opposite, corporations liked having health care tied to employment. You couldn't quit -- you needed the health care.

I quit my job 18 months ago -- I don't know how many people in the office came up to me and told me they wished they could do the same. They hated their jobs, but they needed the health care.

There was even one woman who had enough income to live on, but she was a single mom and her daughter has diabetes. She had enough money to live on but not enough to pay sky-high insurance premiums too. She's a wage slave.

[Tansy_Gold]

19. Obviously it was a choice for you. You weren't forced into

unemployment.

The point I'm trying to make here is not so much who to blame or what was their motive, but rather that the root cause isn't the housing bubble. Rather, the destruction of the job market precipitated (in part) the collapse. Was, therefore, the destruction of the job market also a cause for the creation of the bubble?

The more the powers that be look at the housing market, at the foreclosures and the private financing and the subprime and Alt-A collapse, the more I think they're looking at fixing a symptom rather than effecting an actual cure. Worse, I fear -- perhaps out of my own ignorance -- that whatever they do to fix the situation, meaning throwing trillions of dollars (real or imagined) at the people who caused the problem, will ultimately make the whole collapse even worse.

My intention, therefore, is to suggest looking at an alternative explanation, in a sense a return to examining the real fundamentals of the American economy, and indeed of ANY economy. And in that sense, much as I hate to admit it, McCain't may have inadvertently been right: the American worker is fundamentally the basis of the economy and it's the system that fucked everything and everyone over.


Tansy Gold

[nichomachus]

21. I'm not disagreeing with you -- just expanding on it

:hi:

[hay rick]

24. Conspiracy theory.

"Something caused the housing bubble...It was a determined and coordinated effort on the part of certain greedy individuals to milk the working classes without actually giving them work."

IMHO: determined yes, coordinated no. I agree that the bubble and aftermath was the work of "certain greedy individuals" with the proviso that they number in the thousands or tens of thousands. I think of them as an intermingling class. I think they have a shared set of values that make them think and act alike. They think of themselves as a meritocracy and see acquisition of huge sums of money and the things that money can buy as validation. External consequences do not affect them beyond the requirement for a perfunctory expression of regret.

The housing bubble was driven by a multitude of factors and was not the intentional work of any single or even small group of individuals. A lot of attention lately has focused on where the money came from and the lack of oversight - mortgage securitization, derivatives, etc. Not much current attention to the demand side- the buyers. One thing that drove up prices was the popularization of real estate speculation. I think a lot of loose money was looking for a new home following the dot.com bust- and it ended up in real estate, accelerating appreciation. It made real estate look like a better "investment" than it was. The speculative burst in appreciation was bait and the new unregulated adjustable-rate-no-doc-subprime-etc mortgages were the hook for the working stiffs. The Moodys-says-it's-AAA CDOs and the credit default swaps sans reserves were the hydrogen bombs waiting in the wings- ready to take us all out.

[Raster]

26. After the last eight years, I think we all now know the meaning of conspiracy theory.

It's "look over there while I pick your pocket over here." "Conspiracy theory" is a distraction. A dodge.

[Tansy_Gold]

27. Less a tinfoil hat conspiracy theory and more

a political/economic agenda.

But again, my intention is less in discovering the culprits and more in examining the futility of any kind of "recovery" or "rescue" or "bail-out" that doesn't include the restoration of an economy based on a viable working/middle class that has plentiful living-wage (not minimum wage subsistence level) jobs. McCain't has mentioned jobs occasionally, Obama more often, but I don't see ANY of the bail-out proposals addressing what caused the decline in jobs and how to reverse that.

And not that it's necessarily pertinent to that examination, but I also think that part of any economic "recovery" program must be a kind of consciousness-raising effort that mitigates the first world v. third/fourth/fifth world gap as well as addresses global environmental issues, especially those related to the excessive consumption of consumer economies like the U.S.

Tansy Gold

[hay rick]

28. Bland middle class America...

Is my economic ideal. Anyone who is willing to work should be provided with the opportunity and that should translate into a comfortable living wage. Whether by design or by dumb luck we hit something like that circumstance in the 50's and 60's so we know it's doable. Disgracefully, we have been getting further away from it ever since.

I think the shared experiences of the Great Depression and WWII had a lot to do with creating the great middle class society of the 50's and 60's. The looming crash may provide an opportunity for renewal on the flip side.

[Dr.Phool]

29. You caused it!

And we're going to hold you accountable.

:toast: