It is like you want me to think you are a clown.
I have explained what I thought about the price increases in 1997 like 3 times now and you don't know if I know the prices increased in 1997.
I owe an apology. I thought you had repeated the idea that it didn't start in 1997. My mistake. I jumped too quick in my reply.
Now I can move on from that point.
Saying that a price spike is not unusual, doesn't mean anything. Nor does it change anything that I have said.
The price spikes in the 1970s were the result of high inflation, which drove up prices. Drastic devaluing of the currency through high inflation, typically results in people investing in property. That increase in people investing in property as a hedge against inflation, naturally results in a price increase. If you look, the housing price bubble started in 1976, right after inflation peaked in 1975 at 12%.
In the 1980s, the cause was a sudden lowering of interest rates, and a high GDP growth rate. The boom started right at 1984, when the growth rate hit nearly 10%, and the interest rates were cut in half from their 1970s high.
Both of these have clear policy causes.
If you look at the broad spectrum of the graph, house prices have been relatively stable from the late 1940s, until 1997, with only those two exceptions of the 1970s inflation, and the 1980s interest rate cut and high GDP.
What happened in 1997? None of these. There was no huge inflation. There was no spike in interest rates, or sudden drop in interest rates. There was no boom in the economy, which was fairly steady at 4% to 5%.
There is no explanation, and yet the housing market made a drastic increase in prices.
You have not given any satisfactory explanation to why that happened. I suggest I did. Freddie Mac, validating Sub-prime Mortgage Backed Securities, with a AAA rating, in 1997, would explain why there was suddenly a drastic increase in sub-prime loans, and that would explain why prices dramatically increased, because lowering the lending standards, by securitizing sub-prime loans, increased the number of people who qualified to get a mortgage. Increased Demand, static supply... price goes up.
Again, unlike the prior two booms, you can't blame it on interest rates going up or down, because they didn't in the late 1990s. You can't blame it on inflation driving investment, because there was little inflation. You can't blame it on a booming economy, because there was no booming economy.
There is no logical, identifiable reason for this price bubble, other than what I have outlined.
So again, here is your opportunity to give your own reason. What do you think caused the price bubble in 1997?
Interesting side note, the Home Mortgage Disclosure Act, was pushed by liberals as a solution to so-called mortgage discrimination, and passed in 1975. Odd that directly after the very first attempt at mortgage affirmative action, that there was a bubble. However, I can find no evidence linking the bubble to this act. It was more likely the high inflation rate. It is an interesting coincidence.
Like I said before there are many reasons why the prices would have started to increase in 1997. If I was only given two choices, lower standards on loans or the rise of MBS that hid those sub-prime loans I would go with the MBS. That said there were other nations seeing a rise in home prices and it is very hard to know exactly why there was a boom in 1997.
There is no doubt that MBS played a massive part in the boom and bust as I have already talked about. No one is denying this as far as I am aware and the single biggest problem with the MBS is the hidden risk. A risk that increases drastically in a bubble and hides poor behavior by those creating the mortgages in the first place.
A lot of people at these financial institutions and ratings agencies get paid a lot of money to know the risk on an investment. Decision makers are paid a lot of money to know and make the right decision for their companies. The idea that a government agency is at fault for hiding risk from them is absolutely ridiculous. I don't care if F&F rated them AAA(which they have no authority to do), there is no way a private company would outsource the health of their own company to a government agency's analysis. The system doesn't work that way and you keep suggesting that it does which is absurd.
While I am uncertain about 1997 I am certain that the drop in interest rates played a big part in the crisis as did the proliferation of sub-prime loans that were not mandated by the government.
You can blame the government for failing to regulate and failing to enforce regulations. You can blame F&F for not understanding the risk of the MBS. You can blame government for repealing Glass-Steagall. You can blame the The Commodities Futures Modernization Act. You can blame interest rates. You can blame anyone who ever thought markets could regulate themselves. Blame is everywhere but very little of it actually rests at the feet of some poor people getting a sub-prime loan. That is what this issue is ultimately about, not blaming government generally or capitalism or whatever. There is enough blame for everyone except the people who actually need these laws. The economy doesn't come crashing down because some poor people got a mortgage.
But see, we know the "many reasons" for the 1970s and 1980s bubbles.
The 'many reasons' that happened in those bubbles, didn't exist in the 1997 bubble.
You mention lowering mortgage standards, and Mortgage Backed Securities.
Here's the key to both of those. They were both results of the government. Who created Mortgage Backed Securities?
Government created MBS.
Ginnie Mae guaranteed the first mortgage pass-through security of an approved lender in 1968. In 1971, Freddie Mac issued its first mortgage pass-through, called a participation certificate, composed primarily of private mortgages. In 1981, Fannie Mae issued its first mortgage pass-through, called a mortgage-backed security. In 1983, Freddie Mac issued the first collateralized mortgage obligation.
The first mortgage security, the first MBS, the first collateralized debt (mortgage) obligation (CDOs). All of them were created by the government.
Further, if it was merely MBSs that caused the problem, then why didn't it start in 1968? Or 71? Or 81? Or 83? Mortgage securities have existed for nearly 30 years, before it caused a price bubble of 1997.
Can you explain why after so many years, suddenly MBSs ruined the entire market?
I can... Before 1997, you couldn't make, or securitize an MBS with sub-prime loans. Freddie Mac changed that by inking a deal in 1997, to bundle sub-prime loans into MBSs, and that drastically altered the entire fundamentals of the market, and led to all the other problems.
In other words, the lowered mortgage standards is what caused the problem. Not MBSs, or the problem would have happened for 30 years prior, or even today. MBSs are still the primary mode of mortgages today. Nothing has changed in that regard, so we should expect the same problems all over again.
A lot of people at these financial institutions and ratings agencies get paid a lot of money to know the risk on an investment.
Yes, but the government was suing them. Listen, if *I* myself, am working at a bank, and they are paying me to minimize risk, and the government comes and says "You either make these bad loans, or we're suing you, and you'll lose your $200K job, and you'll get creamed in the press for 'mortgage decrimination' and your reputation will be ruined for life", chances are I'm going to rate them how the government says to.
Here's the kicker.... YOU WOULD TOO. If you have a job making $200K, and the government says make bad loans or lose your $200K job... you'll make the bad loans. Most people would. Why should you lose your life, for the sake of a government edict?
I don't care if F&F rated them AAA(which they have no authority to do), there is no way a private company would outsource the health of their own company to a government agency's analysis.
They don't have the authority? F&F is backed by the Federal Government. There is no higher authority in this country. Have you not read the history of Freddie and Fannie? The whole point of these institutions is to directly influence the mortgage market on behalf of the government, and you think private companies are not influenced by them, when that is their whole entire purpose for existing??
Of course they are influenced by F&F. They all are. Now you can say they shouldn't.... yeah I agree. But they are... cause F&F are the biggest players in the entire economy, and they are backed by the highest authority in the entire country.
Sorry, but that is a weak, very weak argument.
While I am uncertain about 1997 I am certain that the drop in interest rates played a big part in the crisis as did the proliferation of sub-prime loans that were not mandated by the government.
Right, but again, just like your previous statement.... the mortgage market is influenced by the biggest players, which are F&F, who have the backing of the Federal Government.
If I can find the congressional testimony, I'll post it where a CEO of a bank, openly said the whole reason they started bundling sub-prime loans in their MBSs, was because Freddie Mac started doing it.
If Freddie Mac, or Fannie Mae, or both, are doing X, and they are backed by the Federal Government, then obviously X is safe.
Now you can claim that private banks should not have assumed X was safe, just because the government did it, but the fact is, that is what people assumed. You can't say 'sub-prime loan from Bear Stearns is safe' and 'sub-prime loan from Bank X is not safe'..... why would you assume that?
Again, once Freddie Mac gave their seal of approval on Sub-prime loans, the rest of the market followed. You can say they should not have, but that is denying the entire purpose of Freddie and Fannie, which is to influence the market, with the authority of the Federal Government. That's the whole reason they exist.
You can blame the government for failing to regulate and failing to enforce regulations. You can blame F&F for not understanding the risk of the MBS. You can blame government for repealing Glass-Steagall. You can blame the The Commodities Futures Modernization Act. You can blame interest rates. You can blame anyone who ever thought markets could regulate themselves. Blame is everywhere but very little of it actually rests at the feet of some poor people getting a sub-prime loan.
I don't think they 'failed to regulate'. It was actually those regulations that pushed bad loans, that the banks were following. When the government is suing banks to make bad loans, all claims that "they failed to regulate" are mute. Did you really expect the regulators to come and fine banks for making bad loans that the Clinton Administration just sued them to make? Think about that.... the regulators go and levy fines on banks for making loans the Clinton administration, just sued them to make.... is that going to happen? No. They were supporting the regulations of the administration, to push sub-prime loans.
Further, Glass Steagall had NOTHING to do with the crash. NOTHING, as in NOT ONE THING to do with it. First, the supposed repeal happened in 99, and clearly the bubble and sub-prime boom, started in 1997.
Second, most of the banks that failed, would have not been affected either way by Glass Steagall.
Third, most of the rest of the world, has never had Glass Steagall regulations, and the problem didn't originate in Europe, nor did it happen in the last 50 years they didn't have GSA regulations.
There is zero evidence that Glass Steagall, had any effect either way, on the sub-prime melt down.
True or False... IF no unworthy borrowers has borrowed any sub-prime loans, there would not have been a crash.
If True, explain how they can't possibly be partly to blame?
