Bubbles: Part 8 - US housing (2002 - 2006)
Let's look at the U.S. housing bubble that financial engineering inflated from 2002 to 2006 and break down what happened.
What The F#ck Happened?
Setting The Scene
After the 2000 Dot Com crash had wiped out stocks, investors were looking for new, safe sources of return. The tech mania had shown many investors that it was easy to get swept up in the hype of stocks, and it had demonstrated to many creditors that getting money back from bankrupt firms is difficult.
Investors started to look at mortgages as these loans acted essentially like a bond. Investors would receive regular interest payments, and if the borrower default, investors would take possession of the house. This collateral was a handy fallback as real estate prices were starting to rise, which meant recovering the loss wasn’t a problem.
Investors didn’t want to buy a single mortgage, though. That would have been annoying to administer and would have meant that the risk of not getting paid depended on one household. With their deep pools of capital and industry expertise, investment banks noticed this and started buying mortgage…