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PeakTrader said...

It's a bubble only after it bursts. Few people predicted the bursting of the housing bubble.

The housing boom raised actual output towards potential output, i.e. closed the output gap around 2004.

A gradual tightening of lending standards, e.g. in 2004, would've led to slow and shallow, rather than sudden and sharp, adjustments in the housing market.

Typically, it's cheaper when imbalances correct slowly rather than suddenly.

Bush Administration Tried to Reform Freddie and Fannie Five Years Ago
CBS News
February 19, 2009

Karl Rove, “We were briefed as far back as 2001 about the problems with Fannie and Freddie; in fact, we moved aggressively in 2004 to regulate Fannie and Freddie, actually got a bill through the Senate Banking and Finance Committee only to have it filibustered by [Sen.] Chris Dodd.”

Rove said Fannie Mae and Freddie Mac “accelerated their imprudent behavior after we attempted to regulate them. They bought almost as much mortgage debt from 2005 through 2008” as they bought in their first 30 years of their existence.

“In fact, in 2003, when we sent our first members of the Cabinet up to talk about this on Capitol Hill, Barney Frank had a hearing in which they basically beat up everybody we sent up there in pretty vociferous language. This is the famous hearing where one of the Democratic members literally says that he is ‘pissed off’ that the administration is even raising this issue,” Rove said.

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