Reactions To The Housing Bubble Burst

By Author: Lawrence Roberts
Total Articles: 4717
Comment this article

When a bubble in a financial market pops, it does not explode in spectacular fashion like a soap bubble; it is more comparable to a breached levee which releases water slowly at first. Once the financial levee is ruptured, the equity reservoir loses money at increasing rates. It washes away the imagined wealth of homeowners who bought late in the rally or used home equity lines of credit to fuel consumer spending until the reservoir is nearly empty and the torrent turns to a trickle. Ultimately, the causes of failure are examined, the financial levee is repaired, and the reservoir again holds value, but not until the dreams and equity of many homeowners are washed away.

Denial runs deep in the financial markets. The vast majority of participants either wants or needs prices to steadily increase. Any facts or opinions that run counter to the idea of ever increasing prices must be quelled in order to prevent a catastrophic collapse of prices due to panic selling. One of the more glaring examples of this phenomenon was the slow leak of information regarding the debacle in the housing market.

In February and March ...
... of 2007 as the subprime lending implosion became front page news, market bulls were presented with a major public relations problem. It was imperative for the bulls to convince buyers the damage from subprime lending was "contained" and would not "spill over" into other borrower categories and ultimately into the overall economy. The supposition was that the widespread use of exotic loans was not the problem; it was the practice of giving these loans to those with low credit scores. In other words, it was not the loans, it was the borrowers. This was wrong.

It was not the borrowers; it was the loans. Exotic loans were given to people of all credit backgrounds. Subprime borrowers where the first to show distress, but the Alt-A and Prime borrowers had the same problems and experienced the same outcome.

The reactions of pundits, government officials and others regarding the housing bubble were a mixture of duplicitous self-interest, and ignorant denial. The problem was never limited to subprime as many proclaimed. There were many market analysts who concluded the problem was much larger than subprime, but these experts were dismissed by ignorant market apologists.
About Author:
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit Reactions to the Housing Bubble Burst.