Robert Shiller … in 2005, … wrote that in some cities “the price increases may start to slow down, and then to fall. At the same time, it is likely the boom will continue for quite a while in other cities.” Now, compare this modest warning by a lone economist to the forces promoting home lending from all directions. It was not just a Wall Street phenomenon, but one pushed by our government, legislators, regulators, and even academics (for evidence, see Stan Liebowitz’s “Anatomy of a Train Wreck“ … the Federal Housing Administration was, and is, offering loans with only three percent down, and during the boom, the Department of Housing and Urban Development promoted a program where even this minor investment could be paid for by the homebuilder. …
In light of this governmental housing exuberance, I doubt that a more powerful government would have mitigated the boom — rather, it would have made this crisis worse. Indeed, it was only the collapse of the subprime market at the beginning of 2007 as reflected by the ABX-HE subprime housing index that alerted people to the severity of this problem, and shut off financing by mid-2007, six months later. Market prices, not legislators, instigated the end of the insanity. How quickly are failed governmental initiatives usually stopped, once identified?
Human estimates are error prone; we make mistakes. Since we listen to each other, we share our errors; we make the same mistakes together. Our society contains many different social institutions, so those institutions tend to reflect the same estimate errors. Thus to give credit or blame to particular institutions for a shared error, we have to look closely at who was more pushing the error to be larger or smaller, and when.
The increase in our shared housing error was slow, making it hard to say which of our institutions was pushing more for larger errors. But the decrease in our shared housing error was fast, making it easier to assign credit there. And according to Eric, speculative markets were the first of our institutions to clearly say we had overestimated housing values. If we want more such error-correction in the future, we should empower such institutions more, not less.
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