The U. S. has wasted its “subprime” mortgage crisis. The story of how and why this has happened is of interest not only for its own stake, but for the broader themes it reveals. I am a theoretically trained economist who started investigating US housing finance markets more than 20 years ago.
Nobel laureate Ro, Shiller and i separately made proposals to reduce systemic risk in the market. Yet our reform efforts went nowhere during the good times. We could not grab scarce public, press, or political attention with the claim that an apparently well- functioning system was profoundly flawed.
Naively as it turned out, we each believed that the housing finance crash might finally cause more fundamental questions to be asked. After all, our ideas on risk sharing were directly relevant and would have lessened the impact of the crash. We each made specific proposals to speed recovery from the crash. For a while it seemed as if there would be real progress. Our hope was short-lived. Nothing positive has come out of the “subprime" crisis. The changes that have been made treat the nature and ignore the illness.
The US housing finance system is in worse shape than ever. The policy reform process is broken, and there is no quick fix sight. The breakdown of the reform process is simple to understand as it is tragic. Public servants can all too easily prevent experts from judging their performance. This leaves an inexpert press and a readily distracted public as the only sources of reformist pressure. The press commentates on policy responses based on ideological mandates from an ideological readership. The public tweets approval. Unexamined, institutions and opinions continue to ossify.
The problem is deep and pervasive. Many policy-makers have much to fear from exposing their activities to experts who might attract public attention to their failings. Without experts, their performance simply cannot be assessed. This liberates spinners, which is positive for most in the press whose technical training leaves them unable to sort through the competing claims of knowledgeable experts and less knowledgeable policy-makers and pundits.
Even when reform is called for, it is impossible to effectively monitor implementation when experts are kept at arms’ length. Let me return briefly to the case of US housing finance policy. One must predict that Fannie Mae, Freddie Mac, and the FHA will survive unscathed. Without fundamental re-thinking, risks will be allowed to multiply unseen. The seeds are even now being sowed for the housing crash of 2025 - 35 and the bailout of 2027-37.