My research explains why Foote, Loewenstein, and Willen are right that marginal lending wasn't a cause of the boom, why Mian and Sufi were mistakenly led to think there was, and why, by ignoring the importance of rent and geographic exclusion through housing, they are all wrong to miss the importance of supply in the middle of all of it.
In short, Mian and Sufi focus on the difference between homes in the top tier and bottom tier of each city, and control away the differences between MSAs. The difference between MSAs is the story. FLW argue that since credit and the bust extended across the spectrum of households, that irrational exuberance and speculation must have also extended across the spectrum. But, incomes and rents in the Closed Access cities where homes were bid up to the highest prices have continued to rise just as strongly as they had before, if not more strongly. So, despite our national efforts to keep money out of housing, home prices in those areas have also been strong. If the country was full of housing speculators, they were prescient speculators.
As Willen says in the article: “Our understanding of asset prices is still quite primitive,” he said. “We don’t have a really good explanation for why house prices went up as much as they did.”
I do. I hope they believe it when they see it. It confirms their findings. Notice that even the heterodox researchers of the housing bubble, when left with a gap in understanding, default to the speculation thesis. This bias is deep and broad.
The article ends:
Alan Blinder, the former vice chairman of the Federal Reserve under President Bill Clinton, said that the decisions made on Wall Street merit scrutiny, even if subprime lending was only one aspect of the broader problems in the market.“There was a big housing bubble, a craze, and house prices just went through the roof,” Blinder said. “That by no means exonerates Wall Street.”
Contrary to Rep. Jeb Hensarling (R-Tex.), chairman of the House Financial Services Committee, and his Republican allies on Capitol Hill, Blinder warns that another major financial overhaul could give bankers too much leeway.
“It would be a horrible mistake to dismantle Dodd-Frank,” he said.
I think I have posted a version of this graph before. It compares the relative home prices of the top and bottom quintile zip codes of each group of MSAs since 1999. I had been concentrating on the divergence between the top and bottom quintiles after the GSEs were taken over and the Fed finally messed up badly enough that even they started providing nominal support in early 2009. Top tier homes stabilized after that, but bottom tier homes continued to fall. The GSEs basically stopped lending to the bottom tier.
But, I had neglected to pay much attention to that odd false nadir in relative home prices in mid 2010. Guess what was passed in July 2010? Notice the difference between top and bottom tier home prices before and after July 2010.
Beware the public official seeking "prudence" in the midst of a crisis.