Housing Bubble? What Housing Bubble? Meet The Boston Fed Economist Who Says We Won’t See the Crash Coming Next Time, Either
In the years since the start of the biggest American financial crisis in generations, the reasons for the meltdown have begun to harden into conventional wisdom. Everyone agrees on the root of the problem: a housing market that ballooned wildly, then collapsed. But exactly where to place the blame is a matter of dispute. Conservatives tend to point the finger at the individual homeowners who took out loans they were incapable of paying back—and ultimately, at the government that pushed for looser lending standards in the first place. Those who lean left point squarely at the financial industry, which flooded the market with deceptive mortgages and then sold the risk off in the form of complicated new securities.
Then there’s Paul Willen, a research economist at the Federal Reserve Bank of Boston.
Willen, a 44-year-old father of two who lives in Brookline, moves through the world in a state of dismay and occasional fury at the fact that absolutely no one—not the media, not the public, and not his fellow economists—seems to understand the truth about what happened. Since 2008, Willen, a mortgage specialist, has pored over troves of data and emerged with a powerful, counterintuitive conclusion: that the real reason everything ended so badly wasn’t adjustable rate loans, or government housing policy, or esoteric financial instruments. Rather, it was a single underlying assumption that almost everyone in the market, from bankers to home buyers, shared: that American house prices would continue to go up indefinitely.
Willen has spent the past four years trying to persuade people of what he sees in the data: that everyone in the drama acted perfectly rationally. Under the assumption that the real estate market would continue its steady rise, it made sense for families to buy homes they couldn’t afford, and it made sense for bankers to buy up subprime mortgages. This belief —Willen thinks of it as a mass delusion—fueled an immense bubble that could not be reliably identified for what it was.