Friday, June 14, 2013

Credit bubble

"After the Great Recession, many commentators talked about the "housing bubble" and how problems in the economy were the result of the unprecedented run up in housing prices. For eight years, housing prices in the United States increased at double digit rates, fueling vast amounts of speculative buying and the psychology that housing was a great investment and could only go up. Describing the problem in that way makes it very difficult to construct a solution. How do you change human nature to eliminate bubbles? How do you prevent developers from building too much housing?

On the other hand, if we view the problem as a credit bubble, we might be able to protect ourselves and speed up the recovery time after future recessions. While no one can predict when the housing market will crash or how far it will fall, the loosening of credit standards for mortgages is easy to gauge. For example, in December 2007, the New York Times reported, "Fed officials noticed the drop in standards as well. The Fed's survey of bank lenders showed a steep plunge in standards that began in 2004 and continued until the housing boom fizzled."