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comment by sphericalvoxel
sphericalvoxel  ·  4328 days ago  ·  link  ·    ·  parent  ·  post: Ayn Rand is for children.

Well, mortgage bubbles in particular tend to be accompanied by mortgage fraud.

One of the biggest factors in the global financial crisis was so-called accounting control fraud: executive compensation was (is) based on quarterly revenue, and executives could fraudulently increase quarterly income by issuing a ton of loans with negative expected returns. The bank might go under in five years, but why does the executive care? Then, on the flip side, brokers are paid on commission, so they have strong incentives to make sure that mortgages make it. I point this out to say that neither morals nor "rational self-interest" represented serious constraints on the growth of lending, because the problem with the argument from self-interest is that it's usually considered with respect to the wrong person's interests.

Anyway, during the later days of the real estate bubble of the '00s, the focus for particularly bad lending shifted to loans in which banks did not actually verify the applicants' stated income. (This is normally reserved for people who the bank has good reason to believe are actually good for it.)

So I suppose the point is, in principle this could represent a higher constraint, but in practice, "where there's a will, there's a way."





mk  ·  4328 days ago  ·  link  ·  

I have no doubt that mortgage fraud played a big role. But what I am suggesting is that monetary policy could fuel an asset bubble simply by increasing available credit by pinning down rates. No doubt, relaxed lending and fraud would only exacerbate this, which I'm sure it did.

sphericalvoxel  ·  4328 days ago  ·  link  ·  

Yes, I suspect that is possible, but then my theory of asset prices is that people have a bias toward the status quo, and the perception of change ("new information") makes people think prices should change, so they proceed to change prices. So there is a question about how much policy rate changes are just due to this sort of circular reasoning ("something should be happening, so let's do something!") versus actual changes to the availability of credit.

That being said, the real skepticism here is whether monetary policy can be used to stop an asset bubble once it's started.