Paul Willen: Housing Price Predictions Caused 2008 Financial Crisis

What caused the global financial crisis of 2008? Reckless Wall Street financiers, who bundled and sold off those toxic mortgage-backed securities and credit default swaps — earning billions for themselves, while fanning the flames of economic disaster? Government regulators, including officials from Congress, the Treasury and the Fed? Or individual homeowners, who took out loans they were incapable of repaying?

Paul Willen of the Boston Fed argues that for the most part, everybody — from the bankers to the lenders to the regulators to the homebuyers — behaved more or less rationally.

However, they were all deluded by the mistaken belief that American home prices would continue to rise indefinitely. Nobody saw or believed that there was a bubble that would burst the way it did.

And Willen says that's what caused the crisis: Take away that blind faith that home prices would only go up, and none of this would have happened.

(The idea for this segment came from a Boston Globe Ideas section story, "Housing bubble? What housing bubble?")

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