DSGE
VIP Member
- Dec 24, 2011
- 1,062
- 30
Mark to market accounting caused the housing bubble (and it probably will again), not inflation.
How do you figure?
Easy - the banks were fine with lending more of our money at favorable rates as long as housing prices went up and housing prices kept going up as long as banks continued to lend money at favorable rates. FAS 157 was (truthfully) *imposed* on Fannie and Freddie in '06 and was widely used before that. The problem wasn't really that people were buying more house than they could afford. The problem was simply that house prices were falsely high because the positive feedback loop created by FAS 157 made home ownership unreasonably expensive. That is the root cause and all the problems that came afterward, from obscene bankers bonuses to the subprime derivatives crashing the investment banking sector to the high unemployment rate - it all traces back to FAS 157.....
.... which is still the accounting standard used. But it doesn't matter because the housing market sucks. If it ever recovers we'll be screwed again.
I don't get what feedback loop you're talking about. Or how it made home ownership "unreasonably expensive" (or why "unreasonably expensive" home ownership would make the housing market crash). Also credit didn't crunch until a full year after house prices started to tank. The bubble popped in mid 2007. Credit fell in 2008 around the time Lehman went under.