Cheap credit was at the heart of the mortgage bubble. It fueled an unprecedented rise in housing prices. If housing prices rise at a historic rate for 5 years in a row, who cares about credit quality? Foreclose on a home and you own an asset worth 25% more than the mortgage you made! Don't lower your lending standards and you will make 0 loans in a competitive market where everybody else is giving mortgages away.
I worked with subprime mortgage companies. After the bubble started to pop everybody blamed it on stupidity and greed. These qualities were surely involved. What goes up, after all, must come down - but try to time the pop! In the end, the bubble was market-driven and the market was Fed-manipulated.
We had a soft recession in 2001 because of cheap credit. We get another recession in 2008 because of that same cheap credit. End of story.
Yeah I agree, though my point wasn't so much about the bubble than about the crash. The crash was precipitated by a critical mass of foreclosures, which was attributed mainly to sub-prime borrowers. A softer landing could have been achieved if there were stricter lending regulations, and the bubble wouldn't have been as high either.
I wanted to respond to the assertion by the poster that this was all a result of government interference. Yes, the government (via budget deficits) and the Fed (via monetary expansion) were meddling with the market, but the nature of the free market itself was a contributor. The market isn't perfect and neither are regulations, but it's not an all or nothing proposition... there needs to be balance.
I worked with subprime mortgage companies. After the bubble started to pop everybody blamed it on stupidity and greed. These qualities were surely involved. What goes up, after all, must come down - but try to time the pop! In the end, the bubble was market-driven and the market was Fed-manipulated.
We had a soft recession in 2001 because of cheap credit. We get another recession in 2008 because of that same cheap credit. End of story.