Discussion Paper
Why did so many people make so many ex post bad decisions?: the causes of the foreclosure crisis
Abstract: This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.
Keywords: Mortgage loans; Global financial crisis; Housing - Prices; Foreclosure;
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Bibliographic Information
Provider: Federal Reserve Bank of Boston
Part of Series: Public Policy Discussion Paper
Publication Date: 2012
Number: 12-2