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Editing: The Housing Bubble in 4 Easy Steps

URL	/daily/3130/The-Housing-Bubble-in-4-Easy-Steps
ID: 3130	Published Featured on Homepage #1 Feature Date
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Article Text Valid Tags: [product:0] [product:#] [course:0] [course:#] [image] [thumb] [AuthorName] [AuthorName2] [AuthorArchive] [AuthorArchive2] [RSSfeed] [RSSfeed2] [comment] [Embed:#] [bio] [LatestArticle] [AuthorPhoto] [AuthorPhoto] [bio2] [LatestArticle2] [AuthorPhoto2]	<p>1. The Federal Reserve cut interest rates to as low as 1% so that after inflation we had negative interest rates.</p> <div class="chart"> <div class="single-chart"> <div class="image"><img src="http://images.mises.org/3130/Figure1.png" alt="" /></div> </div> </div> <p>2. As a result, mortgage rates fell to an all time low.</p> <div class="chart"> <div class="single-chart"> <div class="image"><img src="http://images.mises.org/3130/Figure2.png" alt="" /></div> </div> </div> <p>3. Low rates caused borrowing and lending to explode, particularly in real estate. For example, commercial banks more than doubled the amount of real-estate loans they made.</p> <div class="chart"> <div class="single-chart"> <div class="image"><img src="http://images.mises.org/3130/Figure3.png" alt="" /></div> </div> </div> <p>4. All these low interest loans <em>had to be extended to people with worse credit ratings</em> and this increased the demand for homes and other real-estate assets. It should not be surprising that home prices skyrocketed. Click on the link below to the Real Estate Roller Coaster:</p> <div class="chart"> <div class="single-chart"> <div class="image"><a href="http://video.google.com/videoplay?docid=-2757699799528285056"><img src="http://images.mises.org/3130/RealEstateRollerCoaster.jpg" alt="" /></a> <div class="caption"> <a href="http://video.google.com/videoplay?docid=-2757699799528285056">Real Estate Roller Coaster</a></div> <div class="caption"> 3 min 42 sec</div> </div> </div> </div> <p>Fannie Mae, Freddie Mac, mortgage-backed securities, and credit derivatives were simply the conduit that made all these bad loans and investments <em>seem</em> less risky than they really were. In this manner the Federal Reserve can fool the market, at least temporarily. In the end the market always reasserts itself.</p> <div class="article-author"> <div class="figure-left"><a href="http://store.mises.org/Bastiat-Collection-P427.aspx"><img src="http://store.mises.org/Assets/ProductImages/Thumbnails/B852_T.jpg" border="0" alt="" /></a></div> <p>Mark Thornton is a <a href="http://mises.org/fellows.asp?control=12">senior resident fellow</a> at the Ludwig von Mises Institute in Auburn, Alabama, and is the Book Review Editor for the <a href="http://mises.org/qjaedisplay.asp"><em>Quarterly Journal of Austrian Economics</em></a>. He is coauthor of <a href="http://store.mises.org/Tariffs-Blockades-and-Inflation-P179C0.aspx"><em>Tariffs, Blockades, and Inflation: The Economics of the Civil War</em></a> and editor of <a href="http://store.mises.org/Quotable-Mises-The-P218.aspx"><em>The Quotable Mises</em></a> and <a href="http://store.mises.org/Bastiat-Collection-P427.aspx"><em>The Bastiat Collection</em></a>. Comment on the <a href="http://blog.mises.org/">blog</a>. </p> </div>
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Edited:	bkmarcus - 9/27/2008 4:30 PM
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