Krugman explains the housing bubble

From his 16 Dec 2010 piece:

It’s not as if the story of the crisis is particularly obscure. First, there was a widely spread housing bubble, not just in the United States, but in Ireland, Spain, and other countries as well. This bubble was inflated by irresponsible lending, made possible both by bank deregulation and the failure to extend regulation to “shadow banks,” which weren’t covered by traditional regulation but nonetheless engaged in banking activities and created bank-type risks.


In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac, the government-sponsored loan-guarantee agencies — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble.

It’s hard to overstate how wrongheaded all of this is. For one thing, as I’ve already noted, the housing bubble was international — and Fannie and Freddie weren’t guaranteeing mortgages in Latvia. Nor were they guaranteeing loans in commercial real estate, which also experienced a huge bubble.


Last week, Spencer Bachus, the incoming G.O.P. chairman of the House Financial Services Committee, told The Birmingham News that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

The future, with the Republicans controlling  the House (Which has control of spending) isn’t looking so hot. Not only are the Republicans absolutely determined to avoid comprehending how the housing bubble began, they very clearly don’t want to do anything to fix it.

Update: Just for the fun of it, here’s the Republican explanation.

Bubbles happen. In retrospect, they always seem easy to identify, but as they are building, experts debate whether they exist—and, if so, why.


We will likely never have a complete explanation for why there was a housing bubble, but we have some clues.


For one, investors shared the same mindset as borrowers, enticed by the belief that home prices ould never fall on a national scale.

Yup, it’s all very mysterious and no on really knows.

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