So what REALLY caused the housing bubble?

[Indy Coug]

http://money.cnn.com/2010/02/05/news...x.htm?hpt=Sbin

[statman]

Great article. Much more accurate as to direct causes than most, without piling too much blame directly on other players (most goes to cogress, IMO).

The one criticism of The Fed/Greenspan that gets missed in this is a big one. By keeping Treasuries at near zero for 4-5 years, caused another big action by The Market. It forced institutional investors to seek low-risk / "risk-free" returns from somewhere other than The Fed.

Pension fund managers need SOME return on their vast investments and they could no longer count on Treasuries for a 3-4% risk-free return. Treasuries dropped to ~1% return, and at the same time, the market was flooded with "risk-free" bonds tied back to all manner of receivables - mortgages, car loans, credit card balances, etc. It seemed that if you divvied-up the receivables in the right way, and then bought insurance to cover different parts of the loss, you could buy a bond at a discount that reflected the expected losses on the receivables net of insurance, and these bonds still paid 4-5%: MUCH better than Treasuries.

The Fed's low rates essentially pushed fund managers into the previously unknown world of asset backed securities. In their hearts, they knew that the claim of 'risk-free' was bogus, but what alternative did they have? The other 'risk-free' portions of their balanced portfolios weren't returning as well as they always had, and people's retirements depended upon a cashstream from these assets. The desperation of these fund managers to get ANY return from their huge piles of cash caused them to overlook a huge risk as inconsequential. The Feds artifically low rates caused fund managers to suspend reality when it came to scrutinizing these new assets...

[Indy Coug]

Great article. Much more accurate as to direct causes than most, without piling too much blame directly on other players (most goes to cogress, IMO).

The one criticism of The Fed/Greenspan that gets missed in this is a big one. By keeping Treasuries at near zero for 4-5 years, caused another big action by The Market. It forced institutional investors to seek low-risk / "risk-free" returns from somewhere other than The Fed.

Pension fund managers need SOME return on their vast investments and they could no longer count on Treasuries for a 3-4% risk-free return. Treasuries dropped to ~1% return, and at the same time, the market was flooded with "risk-free" bonds tied back to all manner of receivables - mortgages, car loans, credit card balances, etc. It seemed that if you divved the receivables up the right way, and then bought insurance to cover different parts of the loss, you could buy a bond at a discount that reflected the expected losses on the receivables net of insurance, and these bonds still paid 4-5%: MUCH better than Treasuries.

The Fed's low rates essentially pushed fund managers into the previously unknown world of asset backed securities. In their hearts, they knew that the claim of 'risk-free' was bogus, but what alternatives did they have. The other 'risk-free' portions of their balanced poortfolios weren't returning as well as they always had, and people's retirements depended upon a cashstream from these assets. The desperation of these fund amnagers to get ANY return from their huge piles of cash caused them to overlook as inconsequential a huge risk. The Feds artifically low rates caused fund managers to suspend reality when it came to scrutinizing these new assets...

I wholeheartedly agree with this post.

[byu71]

The Fed low interest rate policy. The governments everyone should own a home policy. New cool financial instruments allowing people to have something they couldn't really afford. Not learning the lesson of the Clinton economic bubble (which affected stocks) and then making it even worse playing the same games in the housing and mortgage market.