MIT: Independent Activities Period: IAP

IAP 2013



Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis

Christopher Foote & Paul Willen, Senior Economist & Policy Advisor

Jan/14 Mon 10:30AM-12:00PM E51-335

Enrollment: Unlimited: No advance sign-up

We present 12 facts about the mortgage market. We argue that the facts refute the popular story that the recent housing crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead,  borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. We 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.

Sponsor(s): Economics
Contact: Kim Scantlebury, E52-252, 617 252-1565, KSCANTS@MIT.EDU