The “bubble” in the housing market was caused by GREED.
By Daniel at 17 April, 2009, 1:09 pm
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Here are examples of the types of GREED which caused the most recent housing market bubble:
a)Greed by the various sub-dividers of raw land who demanded a higher return on investment than the ROI which had been normal for the past 50 years.
b) GREED by the various townships, counties and cities who saw the “building and development fees” as a method of gaining additional revenue. Many areas went from a 1970’s Permit cost of $250/house to $25,000/house.
C) Greed on the behalf of Builders who demanded a better ROI by adjusting their normal 5% ROI upwards towards 20% ROI.
d) Greed on the builder/developer who decided that they would no longer build a mix of housing which included a single family detached rancher/bungalow of 950 Square Feet in addition to the larger homes that had averaged 1,500 to 2,100 SQ Feet.
e) Greed by any normally employed person who believed they needed a McMansion. And Greed by any one including the lenders who encouraged such homes.
F) Greed by the many lenders who refused to let their sales force make small housing loans.
g) Greed by the “insurance” companies that actually insured against loss the securitized loan packages to firms and people who had no ownership interest in said loans. (Yes sir, I’d like to buy a loss guarantee on 5,000 blocks of GM stock. No sir, I don’t own any of the stock, I just want to buy the loss guarantee.) DOH!
h) Greed by the underlying mass of homeowners who believed the experts who said they would be able double or triple the sales price of a home in two to three years.
i) STUPIDITY on the experts who designed and promulgated the need for an inflationary growth to keep the economy going, and then deciding the least damaging sector was the housing market.
j) And mostly Greed and Fraud on the part of the Wall Street firms that found ways to securitize the originally small loan packages into a big mess that needs “experts” to un-tangle the business model!
–SiouxCityBoy
PS: My father was a General Contractor (building both homes and large commercial structures) I started from scratch and sold real estate, then branched into building, as a General Contractor. I bought my first Rolls Royce from my own income when I was under 30 years old, and had 4 or 5 of them over my working years. I now am 62 years old and live on a few paid for acres, in an 1,100 foot bungalow and drive an old Ford pick-up. I speak with experience.
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“And mostly Greed and Fraud on the part of the Wall Street firms that found ways to securitize the originally small loan packages into a big mess that needs “experts” to un-tangle the business model!”
I think that when it comes to the securitization mess, more than greed, Wall Street got caught up in a sort of naive pseudo-scientific thinking that led bankers and financial economists to put too much faith in the power of mathematical tools to understand market dynamics. As Felix Salmon brilliantly argues in a recent article, it was one single formula (David X Li’s Gaussian copula function) which “killed Wall Street”.
I elaborate on this idea and other related ones in a recent blog post:
http://alanfurth.com/a-whole-new-mind-for-finance
“And mostly Greed and Fraud on the part of the Wall Street firms that found ways to securitize the originally small loan packages into a big mess that needs “experts” to un-tangle the business model!”
In my opinion there was more than greed in the securitization story. Explaining the whole mess through pure ruthless greed is quite simplistic!
I elaborate on this issue and related ideas in a recent blog post:
http://alanfurth.com/a-whole-new-mind-for-finance
Cheers!