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To Speculate Is Rational

By Ethan Brown

In the wake of the housing collapse there's naturally been a lot of debate about the role of homeowners who took on risky mortgages (or houses they simply couldn't afford) in inflating the bubble.

But this is a distraction from the real causes of the credit and housing bubbles which as Calculated Risk recently pointed out were driven by: [More...]

"Rapid innovation in the mortgage industry (securitization, automated underwriting, rapidly expanded wholesale lending, etc), and... a complete lack of oversight by regulators."

CR also noted in comments that "blaming the borrower is absurd" and more provocatively that "it was rational for people to speculate."

This is exactly right as even George Soros admitted in a panel discussion over at The New York Review of Books:

"When I see a bubble beginning, forming, I jump on it because that's how I make money. So it's perfectly rational."

So, ignore the sideshow of Megan McArdle clucking over the finances of Edmund Andrews and his wife: the real issue here is a lack of regulation and "innovation" in financial instruments that did little but lead to the current crisis.

Full post as published by TalkLeft on May 25, 2009 (boomark / email).