Moral Hazard

Who is responsible?

Homeowners - the root of all evil?
Villaägarna - Roten till allt ont?

House prices

Financial Crisis

Rolf Englund IntCom internetional

Home - Index - News - Krisen 1992 - EMU - Economics - Cataclysm - Wall Street Bubbles - US Dollar - Houseprices

Prosperity, apparently forgiving of mistakes, bred the complacency that undid prosperity.

It's the end of an era. We know that 2008, much like 1932 or 1980, marks a dividing line for the American economy and society. But what lies on the other side is hazy at best.
The great lesson of the past year is how little we understand and can control the economy.
Robert J. Samuelson, December 29, 2008

It was once believed that American consumers could borrow and spend more, because higher home values and stock prices substituted for annual savings. Consider: From 1985 to 2005, the personal savings rate dropped from 9 percent of disposable income to almost zero. But over the same years, households' net worth (assets minus liabilities) quadrupled, from $14 trillion to $57 trillion.

Wrong. In recent years, consumers increasingly overborrowed, especially against inflated home values. With the housing "bubble" now collapsed, net worth is falling. Homeowners' equity in their homes -- the share not borrowed -- is at a record low of 45 percent, down from 59 percent in 2005.

So much that has happened was unexpected that the boom and bust's origins are obscured.

These lie in the side effects of declining inflation that started in the 1980s and, in the process of reducing interest rates, boosted stock prices and housing values.

Recall that in 1981, when inflation was 9 percent, 30-year mortgages averaged 15 percent. As rates fell (mortgages were 10 percent by 1990, 7 percent by 2001), home prices rose. People could afford more. With lower interest rates, stocks became more valuable

Even after the "tech bubble" burst in 2000, stock prices at year-end 2002 were seven times their year-end 1981 level. Home prices increased steadily; in the 1990s, they rose 45 percent.

Prosperity, apparently forgiving of mistakes, bred the complacency that undid prosperity. On bad mortgages, losses could be recovered by selling the homes at higher values. Thus rationalized, bad loans were made. Some stocks might decline, but over time, most would rise.
Risk seemed to recede, so investors and money managers undertook riskier strategies.

Our ignorance is humbling.

Full text

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