Working Paper: NBER ID: w18082
Authors: Christopher L. Foote; Kristopher S. Gerardi; Paul S. Willen
Abstract: We present 12 facts about the mortgage crisis. We argue that the facts refute the popular story that the crisis resulted from finance industry insiders deceiving uninformed mortgage borrowers and investors. Instead, we argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. We then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.
Keywords: foreclosure crisis; mortgage market; asset price bubbles
JEL Codes: D14; D18; D53; D82; G01; G02; G38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distorted beliefs about housing prices (R31) | decisions made by borrowers and investors (G11) |
| expectations about housing prices (R21) | borrowers' decisions (G51) |
| payment shocks (G21) | defaults (Y60) |
| collective optimism about housing prices (R31) | widespread risky behavior (I12) |
| insiders' losses (G33) | notion that they profited at the expense of outsiders (Z13) |