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

Christopher Foote (), Kristopher Gerardi () and Paul Willen

No 18082, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We present 12 facts about the mortgage crisis. We argue that the facts refute the popular story that the crisis resulted from finance industry insiders deceiving uninformed mortgage borrowers and investors. Instead, we argue that 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.

JEL-codes: D14 D18 D53 D82 G01 G02 G38 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-ure
Note: EFG
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Working Paper: Why did so many people make so many ex post bad decisions? the causes of the foreclosure crisis (2012) Downloads
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