Question: Have you looked into the federal reaction to the Savings and Loan crisis? If you haven’t, you should.
Not only does it explain exactly why the housing crash collapsed the financial market, it also explains why the United States has, since the early 90′s, increasingly looked the same nationwide.
First, the Federal government shut down S&L real estate loans.
Second, because the real estate market was now tanking because the primary investors weren’t around anymore, the Federal Government set up a panel to begin the commoditization of real estate.
Third, to encourage this new source of investment, real estate investments were given special equity status, equal to bonds or other “secure” investments.
Fourth, when the housing market crashes (as it does every now and then), and the paper value of investments fell, the insane leverage laws which the real estate equity helped companies more heavily utilize caused those companies to become insolvent.
Crashes happen periodically in just about everything: commodities, real estate, currencies, equities, bonds, etc. People invest in them because overall return is still expected to be positive.
I don’t think this is actually true. Assume zero GDP growth and zero change in the ratio of income from capital and income from labor. The share price of your stocks does not increase or decrease, but they pay you an annual dividend. The return is still positive even under overall stagnant conditions.
First, most people buy a house to live in and not as a pure investment. Second, all markets periodically crash (including equity markets promoted on LW as the ideal destination for one’s money) and that clearly doesn’t stop people from investing in them.
Question: Have you looked into the federal reaction to the Savings and Loan crisis? If you haven’t, you should.
Not only does it explain exactly why the housing crash collapsed the financial market, it also explains why the United States has, since the early 90′s, increasingly looked the same nationwide.
First, the Federal government shut down S&L real estate loans.
Second, because the real estate market was now tanking because the primary investors weren’t around anymore, the Federal Government set up a panel to begin the commoditization of real estate.
Third, to encourage this new source of investment, real estate investments were given special equity status, equal to bonds or other “secure” investments.
Fourth, when the housing market crashes (as it does every now and then), and the paper value of investments fell, the insane leverage laws which the real estate equity helped companies more heavily utilize caused those companies to become insolvent.
Perverse incentives lead to perverse results.
Tangential question:
If it’s to be expected that the housing market will periodically crash, why does it still get people investing in it?
Crashes happen periodically in just about everything: commodities, real estate, currencies, equities, bonds, etc. People invest in them because overall return is still expected to be positive.
...assuming either a constantly growing economy, or a constant flow of wealth from those without investments to those with them.
I don’t think this is actually true. Assume zero GDP growth and zero change in the ratio of income from capital and income from labor. The share price of your stocks does not increase or decrease, but they pay you an annual dividend. The return is still positive even under overall stagnant conditions.
First, most people buy a house to live in and not as a pure investment. Second, all markets periodically crash (including equity markets promoted on LW as the ideal destination for one’s money) and that clearly doesn’t stop people from investing in them.
Huge tax benefits in the U.S.
Just found this curious hypothesis:
http://www.theatlantic.com/magazine/archive/2009/12/did-christianity-cause-the-crash/307764/