I haven’t posted as much as usual over the last three weeks and I wanted to let you know what I’ve been up to. I’ve been working on a longish essay, something on the order of 10,000–20,000 words on the financial crisis. It may end up being a book in a later incarnation.
I’m looking at two issues:
Why did prices rise so dramatically between 1995 and 2003?
Without this price rise, the subprime market never takes off in 2004-2006. There would have been no NINJA loans, no loans for 103% of the value of the house, no second houses with zero down, no 80/20 loans and so on.
The second question is why did the investment banks use so much leverage? Why did Bear Stearns put it itself in a position where a 3% drop in asset values made them insolvent? And why did firms lend to Bear Stearns under those conditions?
The standard answers to both of those questions are that people got into a speculative frenzy, ignored the possibility that prices could ever fall, were greedy, overconfident, myopic etc.
But I don’t think so. What I have been doing is looking for evidence that might explain these two phenomena without resorting to animal spirits, social contagion and stupidity. Yes, there were all three of these things along the way. But I don’t think they were the driving force.
I hope to have the essay done in late August or early September. Between now and then I’ll be finishing it up and taking some time off. So I won’t be doing much blogging until the end of August. We’ll also be sprucing up the site in the meanwhile and hope to make it both a little more aesthetic and useful. Looking forward to reconnecting in a few weeks.