Housing Crash Caused by Simple Panic?
The debate rages over the true cause of the housing crash with many including the writer feeling that subprime lending was indicative of the wildly speculative loans so easily dished out in previous years. Others argue that while lax lending standards certainly contributed to an economic crisis, the real cause of market decline was simple investor panic.
Sify.com argues in favor of the latter view:
It is a cliché to attribute the Crash of 2007-08 to the woes arising from the subprime lending in the US. It broke out within days after the meeting of the US Federal Reserve on August 7.
Fear seized credit markets, bred risk aversion and liquidity froze. Warriors (read, investment bankers) who could shuffle billions of dollars across computers in seconds in what was described as “statistical arbitraging” were scurrying for liquidity to bolster the value of their assets.
More than fear, it was the distrust of the value of the assets held by their peers that curdled cash flows.
Panic can cause investors to avoid all companies involved in housing (which seems to be occurring). Whether this is genuine panic or just concern that such companies won’t be able to payoff mortgage debt as foreclosure rise is a matter of opinion.
Comments
Leave a Reply
You must be logged in to post a comment.