AHC and WI: Housing Bubble response 2005

There was talk as early as 2005 -- on the front page of The Economist, among other places -- that the US was in the midst of a housing bubble. Who at the time needed to heed this? What would they had done differently if they had? How would the economy, and thus history, been affected?

CONSOLIDATION: Here's an example -- you might say the guy who needed to know this was Alan Greenspan, and if he had taken better notice, he would have been raising interest rates around this time. UIAM, this would have deflated the bubble by cooling the housing market, resulting in a milder recession starting circa 2006.
 
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BlondieBC

Banned
There was talk as early as 2005 -- on the front page of The Economist, among other places -- that the US was in the midst of a housing bubble. Who at the time needed to heed this? What would they had done differently if they had? How would the economy, and thus history, been affected?

Fed Chairman or the President.

Bubbles are easy to pop, but painful. Raise interest rate to some high number such as 10%, and the bubble will pop, and we will have a severe recession, just not as bad as the one we are having now.

The President has enough power to stop the bubble. Get on TV and talk about how people are going to lose a lot of money in housing. Pressure FDIC to raise insurance rates on banks heavily invested in real Estate. Focus FBI on mortgage fraud. Crack down on Freddie and Fannie., etc.

But by fixing the problem, Greenspan or Bush becomes the most hated man in America. It was no that they did not know, they were just hoping it would fix itself. People at the time thought that prices would just plateau, not crash, and did not want to pop the bubble.
 
By 2005 it was too late to stop the bubble, but they could have put in rules that would limit the fallout of a housing crash. The reason a drop in housing put us on the brink of a worldwide economic crash was due to all the side bets on Wall Street. So have the SEC enforce strict leverage requirements of 11 or 12 to 1 on credit default swaps being issued, instead of the change in 2004 that allowed firms to get to as much as 33 to 1. Make CDS more transparent, or limit who can purchase them to people who own the underlying financial instrument that is being insured.

On the housing front, stop the Office of the Comptroller of Currency from overruling the various State AG's who wanted to go after predatory lenders in their own States. Tell Greenspan not to give that speech where he talks about how great adjustable rate mortgages are, at a time when interest rates were so low the only place they could go was up.

Edit: Apparently the Greenspan speech was in Feb. 2004, so too late to change for this timeline.

Also, the Fed began raising rates in mid 2004, so by 2005 they were already going up.
 
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a Kerry win in 2004 would have made Greenspan, shall we say, more open to the idea that 2005 was seeing irrational exuberance... (;))

By 2005 it was too late to stop the bubble, but they could have put in rules that would limit the fallout of a housing crash.

Could they have popped it earlier, and would that have helped?
 
Could they have popped it earlier, and would that have helped?

If it's done before Wall Street could get so overleveraged and intermingled with derivatives that a housing bubble pop would lead to a domino effect, then the answer is yes. But I don't know the exact date when that tipping point was reached. So in my opinion, the only way to really reduce the problems that would lead to a Wall Street crash was to enforce tougher regulations, increase transparency, and not let them get so over-leveraged with credit default swaps. Some of that could be done through the SEC and the Fed, but limiting who can purchase CDS would probably require legislation from Congress, which would be difficult in 2005.
 
Well, part is due to the massive building boom in the USA. We have 75.56 million owner-occupied housing units. That's one for every 4.09 people.
Cut the building boom and the bubble may stabilize.
 

BlondieBC

Banned
^^Gotcha. I'm not sure when the tipping point was either...

It was in the late Clinton years. The housing bubble is really the NASDAQ bubble, part 2. Clinton started repealing the depression era safeguards, and Bush continued. It was a bi-partisan effort. Once a bubble starts, the pain has to be paid. Just say if the recession was in 2003, it would not have been as severe or as long. Low interest rates to support the economy after the tech bubble collapse blew up the housing bubble.
 
Just say if the recession was in 2003, it would not have been as severe or as long. Low interest rates to support the economy after the tech bubble collapse blew up the housing bubble.

That's what I thought was meant by "before the tipping point" -- would it not be true if the recession started in 2005 or early 2006?
 

BlondieBC

Banned
That's what I thought was meant by "before the tipping point" -- would it not be true if the recession started in 2005 or early 2006?

To avoid the bust, you must avoid the boom. There is no other way. Bubbles always bust. In the late 1980's, the bubble can clearly be avoided, by say 1998, it can not. I can't say when the exact tipping point is with more precision.
 
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