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Why did so many people make so many ex post bad decisions?: the causes of the foreclosure crisis

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Listed:
  • Christopher L. Foote
  • Kristopher S. Gerardi
  • Paul S. Willen

Abstract

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.

Suggested Citation

  • Christopher L. Foote & Kristopher S. Gerardi & Paul S. Willen, 2012. "Why did so many people make so many ex post bad decisions?: the causes of the foreclosure crisis," Public Policy Discussion Paper 12-2, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbpp:12-2
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    More about this item

    Keywords

    Mortgage loans; Global financial crisis; Housing - Prices; Foreclosure;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G01 - Financial Economics - - General - - - Financial Crises
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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