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Boston Economist: It Was the Housing Bubble, Stupids

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There is an economist at the Boston branch of the Fed, a Brookline resident, in fact, who has been tearing his hair out trying to get people to understand what happened to the real estate market in 2007 and 2008—and, by extension, the national economy. It wasn't subprime mortgages, Alan "Maestro" Greenspan, McMansions, Lehman, cats and dogs living together—it was that housing prices were never going to keep going up, and Americans couldn't wrap their collective heads around that grim reality. Leon Neyfakh from The Globe has more from Paul Willen:

Willen has spent the past four years trying to persuade people of what he sees in the data: that everyone in the drama acted perfectly rationally. Under the assumption that the real estate market would continue its steady rise, it made sense for families to buy homes they couldn’t afford, and it made sense for bankers to buy up subprime mortgages. This belief —Willen thinks of it as a mass delusion—fueled an immense bubble that could not be reliably identified for what it was. It's not that those other things were irrelevant, necessarily. Americans still thought that recessed lighting added a bazillion dollars to their homes' values and that no money/no job/no problem mortgages were a viable long-term funding scheme. It's that people have it backward: the housing bubble was not a symptom of larger problems coalescing; it was the problem.

And ignoring that means leaning on the idea that another housing crash—and the economic collapse that might accompany it—can be prevented by policy tweaks guided by that most exact of sciences, economics. Willen again: "Going forward, what worries me is that sometime in my lifetime, not that far in the future, we will have another house price boom, and people will say, ‘We have nothing to worry about...because we’ve regulated away all the bad things that people did.’ That will be wrong." Happy Monday.

· Housing Bubble? What Housing Bubble? [Globe]