Who caused the subprime bubble?

Larry Ribstein —  25 September 2010

Mian, Sufi, and Trebbi have and answer in The Political Economy of the Subprime Mortgage Credit Expansion:  the government, mortgage lenders and mortgage borrowers.  Here’s the abstract:

We examine how special interests, measured by campaign contributions from the mortgage industry, and constituent interests, measured by the share of subprime borrowers in a congressional district, may have influenced U.S. government policy toward the housing sector during the subprime mortgage credit expansion from 2002 to 2007. Beginning in 2002, mortgage industry campaign contributions increasingly targeted U.S. representatives from districts with a large fraction of subprime borrowers. During the expansion years, mortgage industry campaign contributions and the share of subprime borrowers in a congressional district increasingly predicted congressional voting behavior on housing related legislation. The evidence suggests that both subprime mortgage lenders and subprime mortgage borrowers influenced government policy toward housing finance during the subprime mortgage credit expansion.

But I’m sure Bretton James was involved somehow.

Larry Ribstein


Professor of Law, University of Illinois College of Law

5 responses to Who caused the subprime bubble?


    What was the mechanism by which the subprime borrowers influenced their congressperson? Did they have a lobbyist? Doubt it. That blame route doesn’t stick. Wouldn’t the mortgage industry lobbyists aim their efforts at congressmen in districts with subprime targets, promising free ponies for everyone?

    I hold subprime borrowers blameless for this reason: they typically are not as stable or able to plan for the future due to variations in income, their living environment, etc. Someone comes along and says, for the same price you are paying in rent on that apartment, you can live in a house. Sure, it’s an interest only loan but you can refi in 5 years. To someone living a less than stable life, getting 5 years in a new home for the cost of rent, even if you think you have to move in 5 years, is a phenomenal deal. Who wouldn’t take it? Someone falling on their sword for a banking system they don’t understand, that seems to delight in ripping them off? Bankers made subprime loans thinking the borrowers had or were able to lead as stable lives as the bankers themselves, but the borrowers really had very different time horizons and definitions of stability.

    save_the_rustbelt 26 September 2010 at 8:03 am

    Ask ten economists a question and get between 3 and 13 answers. Science? Or trying to make a reputation?

    The poor hapless CDO peddlers and the racketeers at the rating agencies were poor hapless victims of those awful poor people (especially the minorities) who bought houses.

    I’m going to send a fruit basket to Dick Fuld, the poor man was such a victim.

    There is plenty of blame to go around, and the “best and brightest” on Wall Street and in the banks deserve most of it.


    No mention of hot potatoing risk into derivatives? Of the bloated size of the financial sector? About increasing inequality meaning demand had to sustained by ever more debt? About ideological resistance to regulation from those without any direct skin in the game?

    As Warren E. Buffett observed: “There’s class warfare [a recent interest of yours, Larry], all right, but it’s my class, the rich class, that’s making war, and we’re winning.” …


    “The evidence suggests that both subprime mortgage lenders and subprime mortgage borrowers influenced government policy toward housing finance during the subprime mortgage credit expansion.”

    Is that the blockbuster revelation, you are pointing too? One would think that democratic theory of governance would have already supplied that expected explanation.


      “Democratic theory of governance” is Panglossian. Legislation is written by the lobbyist with the biggest bag of bribe money.

      The way to prevent the next banking collapse is to regulate CDSes as insurance (at least to the extent of insisting that companies which underwrite CDSes be capable of paying claims).

      And the only way to prevent the next idiotic bill from being enacted by means of corruption is to ban all incumbent politicians from raising or receiving funds from any source except their salary while in office. Neither term limits nor disclosure laws nor campaign spending limits even slows them down in the slightest.