Wednesday, October 01, 2008

What Caused This Crisis?

If I can find the time I'll try to write up some in-depth comments on what I've been able to digest about the causes for the current economic situation that's prompted "the bailout".

At this point, I largely blame about equally both government and private firms for both engaging in taking on too many subprime mortgages to get low income individuals into houses. The government both adopted policies that encouraged/forced this behavior, but private firms were engaging it in for their own benefit regardless of that. The subprime mortgage arrangements worked as long as house prices continued to grow, but house prices had grown too high and needed a correction which made the whole subprime setup fail. And hard.

For now I'll defer any future discussion of the topic to the following:

Arnold Kling discusses the housing market developments in an excellent and timely episode of EconTalk: Kling on Freddie and Fannie and the Recent History of the U.S. Housing Market. I highly urge people interested in understanding this state of affairs to listen to it.

Some background on Kling:

Arnold Kling is an independent scholar who writes about a wide variety of economic issues. He was an economist on the staff of the Board of Governors of the Federal Reserve System from 1980-1986, and served as a senior economist at Freddie Mac from 1986-1994.

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