Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen
This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors 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.
For a concrete example, consider the size of required downpayments. Morgenson and Rosner (2011) write that because of the Clinton Administration’s emphasis on homeownership:
[I]n just a few short years, all of the venerable rules governing the relationship between borrower and lender went out the window, starting with the elimination of the requirements that a borrower put down a substantial amount of cash in a property (Morgenson and Rosner 2011, p. 3).
It is true that large downpayments were once required to purchase homes in the United States. It is also true that the federal government was instrumental in reducing required downpayments in an eﬀort to expand homeownership. The problem for the bad government theory is that the timing of government involvement is almost exactly 50 years oﬀ. The key event was the Servicemen’s Readjustment Act of 1944, better known as the GI Bill, in which the federal government promised to take a ﬁrst-loss position equal to 50 percent of the mortgage balance, up to $2,000, on mortgages originated to returning veterans. The limits on the Veteran’s Administration (VA) loans were subsequently and repeatedly raised, while similar guarantees were later added to loans originated through the Federal Housing Administration (FHA).
It's really asking a lot of people to tell them over and over that only evil ignorant racist losers notice patterns and then expect them to notice the patterns and respond intelligently.