Credit crunch like bursting bubble
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Kai Ryssdal: Everything’s always easier in hindsight, of course. But you didn’t have to be Warren Buffett to know that giving people loans for houses they couldn’t afford might eventually come back to bite the overall economy.
That said, there is a case to be made that we all really should have known better this time around. Marketplace’s Lisa Napoli has more.
Lisa Napoli: Listening to the financial news these days is like déjà vu all over again.
Here’s what commentators were saying last week:
CNBC Commentator: Ultimately, what has happened is people started to buy things that they weren’t even quite sure anymore what they were . . .
The pundits had the same 20-20 vision back in March of the year 2000, after the tech bubble started to burst. The get-rich quick mentality that has fueled the housing run-up is not terribly different from the dot-com fever at the turn of the century.
Steven Pearlstein: They were taking companies public without profits, income. They were taking companies public that had no product. They convinced themselves that this was a new era, rather than “No, this is crazy.”
That’s financial columnist Steven Pearlstein of the Washington Post. He says that same new-era mentality made people believe that housing prices were gonna keep soaring 20 percent a year, and that anyone could handle a half million-dollar home loan.
Yale economist Robert Shiller wrote the book about dot-com era greed called “Irrational Exuberance.” He says investing in a dot-com company that had no business model is kind of like buying a house with a no-money down, interest-only mortgage.
Robert Shiller: So I think in some sense at least, the housing boom is a continuation of the stock market boom, with a different investment vehicle. Part of what happened in the ’90s is that a lot of people discovered that their true inner selves were investors.
And personal investing has been made easy over the past decade, thanks to an abundance of inexpensive credit.
Financial columnist and author Carolyn Baum says that’s created a perfect climate for run-ups.
Carolyn Baum: Both bubbles were a response to periods of low interest rates. Bubbles do not end well. They don’t. Whether it’s tulip bulbs, real estate, they don’t end well.
And yet, Steve Pearlstein of the Washington Post says it’s human nature to get lured in.
Pearlstein: People kid themselves and fantasize probably going back to Adam and Eve. And there’s nothing you want to do about that or can do about that. That psychology is also important for the functioning of a capitalist system. You want people to be greedy.
Greed followed by fear. Economists say the markets are propelled by this cycle.
But this time, the bust of the bubble could have a wider and more devastating economic impact. After all, houses are very different from dot-com companies or tech stocks.
Pearlstein: That was just, you know, a lot of money that never was really there just disappeared, it evaporated. But that was investment money. This is about where people live, literally.
Or in a growing number of cases in this housing market, about where they used to live.
In Los Angeles, I’m Lisa Napoli for Marketplace.
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