Fed Report Blames Housing Bubble on Speculators

Blaming investors for the housing bubble is like blaming smokers for lung cancer. The Fed should look in the mirror.

Palm Coast, FL – December 14, 2011 – A recently released study by the Federal Reserve Bank of New York concludes that investors, using sub-prime mortgages to purchase multiple properties, were largely responsible for the housing bubble and the following recession. That’s akin to saying smokers are largely responsible for lung cancer. It ignores the role of other parties to the transaction, including the Federal Reserve itself.

There is a speculation gene within each of us. In some, it is recessive; in others, dominant. Responsible public policies and prudent lending help moderate speculation. When policies were functioning properly, those who could afford to buy a home were able to buy one. But those who could not, were unable. For them, the American dream was out of reach.
The Community Reinvestment Act, the acceptance of sub-standard loans by Government Sponsored Entities (Freddie Mac and Fannie Mae), along with the Fed’s easy money policies altered the playing field. They expanded the opportunity of homeownership to those who could not afford to buy a home. Relaxing lending standards and keeping the cost of money low unleashed the speculation gene. It was the Wild West.  Speculators became the real estate equivalent of day traders. Developers, homebuilders, mortgage originators, appraisers, brokers, lenders, and Wall Street investment bankers all jumped into gene pool with unintended, but predictable, consequences.
The speculators were there. They are always there. Public policy did not create them any more than casinos create gamblers. Casinos are built because gamblers already exist. As for the housing bubble, public policy created the casino equivalent with no oversight and bears the brunt of the blame. The government is doing little to mitigate the pain of homeowners who paid too much for their homes. Efforts to solve the underwater mortgage problem are stuck in first gear. Yet, they bailed out Wall Street with taxpayer money and seem unwilling to investigate that well connected group.
4 replies
  1. Barbara
    Barbara says:


    As always, some great insight & succint observations. Our supercilious Fed clearly continues to suffer from myopia as many hardworking taxpayers continue to struggle.
    Maybe even more civil disobedience is called for?

  2. Jim O\'\'Connell
    Jim O\'\'Connell says:

    Enough balme to go around

    Who is to blame for the housing bubble? Many share the blame. Speculators-yes, People who decided to buy a home they couldn’t afford –yes, Banks who lent money to people who had no down payment – yes, federal government who pushed banks and lending institutions to give home loans to increase home ownership – yes.
    There are many seniors living here who remember that when they bought their first home the drove away from their current apartment until the down payment money they had would allow them to purchase a home. We lost that formula and it hurt us.

  3. Howard Sullivan
    Howard Sullivan says:

    Ammen brother!

    The book, "Reckless Endangerment" by Gretchen Morgenson & Joshua Rosner should be required reading. It places the blame squarely on many individuals and Organizations.

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