Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Boston
Public Policy Discussion Paper
Why did so many people make so many ex post bad decisions?: the causes of the foreclosure crisis
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.


Download Full text
Download Full text
Cite this item
Christopher L. Foote & Kristopher S. Gerardi & Paul S. Willen, Why did so many people make so many ex post bad decisions?: the causes of the foreclosure crisis, Federal Reserve Bank of Boston, Public Policy Discussion Paper 12-2, 2012.
More from this series
JEL Classification:
Subject headings:
Keywords: Mortgage loans ; Global financial crisis ; Housing - Prices ; Foreclosure
For corrections, contact Catherine Spozio ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal