We Haven’t Learned the Lessons of the Great Housing Bubble

Did those people who lost their homes during the Great Housing Bubble learn any important lessons? Did people learn that certain financial management techniques don’t work very well? Or did people learn that building a Ponzi Scheme is a great way to manage their finances except during those unexpected economic downturns?share_the_pain

People can learn very valuable life’s lessons from the mistakes of others. If I didn’t believe that, I wouldn’t keep writing. However, this blog is not likely to change the way millions of California borrowers live. As long as lenders enable foolishness, we will have fools who will step forward.

Best Protection Against Another Housing Bubble May be a Generation’s Painful Lessons

By Robert X Cringely Mar 29th 2010 @ 2:30PM

The market value of your house is down 20 to 30 percent from its peak and could have further still to go. Jobs are scarce and the idea that home values will rise again seems remote and more remote workers. But this, too, shall pass (yes, your home value will eventually recover). And I can tell you exactly why — psychology.

The good news is that for all the economic pain and suffering, we’ve probably just bought ourselves, as a people, 50 years of immunity to economic depression. The bad news is that this immunity has nothing at all to do with house prices, public policy, Bernanke, Dodd, Geithner, or Obama, much less Paulson or Bush. It would have happened anyway.

The premise of this author’s entire argument is that people endured the consequences of their decisions and they have been conditioned not to repeat the same mistakes. This is obviously wrong. The moral hazard of innumerable bailouts has insulated the population from the consequences of their mistakes.


The real lesson people have learned is that they can game the system for personal gain and pass the losses on to everyone else. Any real consequences will be avoided. We have guaranteed ourselves another housing bubble and even more massive bailout.

I’m reminded of a story about Sid Richardson. Back in the 1950s, Richardson, a Texas oilman, was arguably the richest man in the world — the bachelor uncle of today’s ultra-rich Bass Brothers. (You though they made that money all by themselves?) Richardson made his fortune from West Texas crude and he owned a refinery in Midland, Texas. One day, a crane operator working on construction at the refinery swung the boom of his crane around and smashed into one of the catalytic cracking towers, knocking the tower clean over. There was a massive oil spill, the kind we’d really worry about today. But this was back in the days when DDT was good and oil spills didn’t matter so much. Still, the accident did cause more than $1 million in damage, and since the refinery was self-insured, that million came straight from Sid Richardson’s pocket. When the catalytic cracking tower was knocked over, everyone had to come have a look, including Richardson. And when they had all shaken their heads and pointed at the destruction, Richardson finally said it was time to get back to work and he sent the crane operator back up to the cab of his crane.

“You can’t send him back to work on that crane!” the refinery manager shouted to Richardson. “The guy can’t be trusted.”

“Believe me,” said Richardson, “he’s not going to make that mistake again.”

There is a lesson here for all of us, because — just like that crane operator — stressful experiences eventually teach the rest of us lessons, too. But unlike that crane operator, it usually takes us three times to figure things out.

That’s what Professor Vernon L. Smith (now of George Mason University) learned decades ago in economics experiments conducted at the University of Arizona — experiments that earned him the 2006 Nobel Prize in Economics. Smith conducted real money experiments with groups of students. In their buying and selling of assets, the students inevitably created asset bubbles that eventually collapsed. Given another try, the same group created a second bubble that also collapsed. But given a third try, the same group consistently showed it had learned its lesson and no more bubbles were created.

… And so this three-strikes-and-you’re-out (of danger) apparently works in real life. That explains why American savers and investors suffered through the Florida Land Bubble collapse of 1925 followed by the Wall Street stock bubble crash of 1929 and the consequent bank panic of 1933, before that same group assiduously avoided repeating any of those behaviors on a similar scale for the next 50+ years.

The cause and effect this author identifies is very weak. We have been inflating and deflating bubbles forever. You can pick any point in time and find three economic catastrophes preceding. The reason we had 50+ years of stability following the Great Depression is that we passed Glass-Steagall and other legislation to limit the ability of lenders to inflate Ponzi Schemes. It wasn’t until we removed these protections in 1999 that problems began. The 50+ years of stability came from the legislation they passed not the personal lessons they learned.

In that 50 years, we had bubbles and recessions, but we had no huge bubbles and no depressions.

The Great Depression turned Americans, who had not been savers in the 1920s, into savers for the rest of their lives. But what the Depression gave us, generational transitions and Reaganomics took away. Savings rates began to drop in the late 1980s just as the Gipper was on his way back to Santa Barbara.

What does this means for today? Well, our generation has experienced the 1990s dot-com bubble and its pop, the 2000’s housing bubble and its pop, and now the Great Recession. We’re in our third time and likely due our own bit of subsequent wisdom as a result.

If it were only true….

The irony here, of course, is that while we credit the SEC and FDIC and maybe World War II for saving us from the Great Depression, it may have been that we were simply fed-up. Similarly, whatever Bernanke, Dodd, Geithner, and Obama finally do to reform the current U.S. financial system may matter less to our future prosperity than the painful lessons we’ve been learning as a people.

It’s us, not them.

This is not accurate. Since people and institutions that were bailed out learned the opposite lesson. The pain was not deep enough to create lifelong changes in patterns of behavior. Once the Siren’s Song of unlimited consumption tempts a recession weary population, “Don’t wait and save when you can have it now….” Have we really endured such hardship that a broad cross-section of society will say no?

Worse, people-learned-their-lesson is the kind of argument lobbyists for lenders will use to convince legislators not to regulate the industry. After all, we don’t need legislative reform if people suddenly got smart and stop demanding unstable loan products. Don’t hinder commerce.

We’ll make the pols look good for a few decades until enough time passes and the cycle of boom and bust starts all over again, as it inevitably will.

But until then, like Sid Richardson’s crane operator, our generation — and only our generation — has probably learned our lesson: we aren’t going to do that again.

I would be both thrilled and amazed if Californian’s choose to behave like Texan’s and reject bidding up house prices to obtain mortgage equity withdrawal. I believe we haven’t learned a thing. In fact, the more people know, the more foolish they feel for failing to join the party last time.