How Wall Street Fueled the Housing Binge

The Financial Crisis Inquiry Commission report deals harshly with those fabulously compensated financial executives who never saw the crisis coming.

Let’s face it: You won't read every page of the Financial Crisis Inquiry Commission report. But FrumForum will, over the next days. So let’s proceed together, page by page, identifying the key points.

Click here to read the entire series.

After the preface, the report proceeds to a lively humiliation of some of the (fabulously compensated) financial executives who never saw the crisis coming.

Charles Prince, the former chairman and chief executive officer of Citigroup Inc., called the collapse in housing prices “wholly unanticipated.” Warren Buffett, the chairman and chief executive officer of Berkshire Hathaway Inc., which until 2009 was the largest single shareholder of Moody’s Corporation, told the Commission that “very, very few people could appreciate the bubble,” which he called a “mass delusion” shared by “300 million Americans.” Lloyd Blankfein, the chairman and chief executive officer of Goldman Sachs Group, Inc., likened the financial crisis to a hurricane.

One thing you take away from all the many books about the financial crisis is that the CEOs of major financial firms were often simply bluffing their way through the day, "Good work, carry on," with no idea of the risks that were being incurred - barely any idea often times (Merrill Lynch!) of what their firms were doing for a living.

The report then argues that everything that people needed to know was there to be known. The crisis was not a "hurricane": It was more like a housefire in a home where people routinely smoked in bed.

Perhaps the most important thing to understand about the housing policies of the 2000s is that they did not succeed in raising home ownership. Mortgage indebtedness doubled in the United States between 2001 and 2007. (p. 7) Yet homeownership did not rise much after 2001, and stopped rising altogether after 2004, peaking at 69.2%. The lending paid for larger homes: the average new home grew 15% in size between 1997 and 2007. (p. 5) Since the crisis, the homeownership rate has tumbled back to where it was before the boom, and there is presumably where it will and should stay.

What the easy lending of the 2000s did do, however, is pay for a lot of non-housing consumption. Americans withdrew $2.0 trillion in home equity between 2000 and 2007. (p. 5) At a time of stagnating incomes for most Americans, the housing boom financed the appearance of economic progress - one reason government was so reluctant to act. Minus the housing bubble, I doubt very much that President Bush would have been re-elected in 2004.

Click here for part 3.

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