Can a new real estate bubble be inflated?
The fact remains that like every financial bubble in history starting with England’s South Sea Bubble and France’s Mississippi Bubble in the 1710s nearly three centuries ago, today’s bubble has been sponsored by the government. Forget the “madness of crowds” free-market propaganda. Insiders and enabling politicians always try to blame the victim. The reality is that Fannie, Freddie and the FHA gave a patina of confidence to irresponsible lending and outright fraud. This confidence game led them to guarantee some $5.3 trillion of mortgages, and to keep $1.6 trillion more on their own books to back the bonds they issued to institutional investors. Their strategy has been to issue bonds paying fairly low interest rates, and use the proceeds to buy mortgages yielding somewhat higher rates. This kind of interest-rate arbitrage is what the S&Ls did in the 1980s – a relevant parallel, as I will discuss below. The myth is that Fannie’s and Freddie’s role is simply to spread homeownership by ma
