How big was the recent bubble in the U.S. housing market?
A. This time we had the greatest house price inflation in U.S. history. The value of U.S. residential real estate almost doubled between 1999 and 2006. The U.S. residential mortgage market was already the biggest credit market in the world, and it grew to have total loans of over $10 trillion. Securitized prime and subprime mortgages were purchased by investors around the world. A financial crisis occurs about once a decade, with markets relearning the same lessons and then forgetting them. Q. Are bubbles just caused by stupidity? A. No. They look stupid in retrospect, but when a bubble collapses many intelligent people get caught. Brilliant model builders and articulate Wall Street bankers helped create the most recent bubble. Economist Walter Bagehot’s 1873 observation remains true: “The period of rising prices…naturally excites the sanguine and the ardent…and the ablest and the cleverest the most…. Every great crisis reveals the excessive speculations of many houses which no one bef
