All around the world, other countries were adopting the U.S. model. Now markets are plunging together all around the globe. To a very large degree, moral hazard is the reason. Once investors and investment professionals believed governments could and would hold up markets, lunatic decision-making proliferated. And led to the crashes that the government could not stop.
After the bursting of the tech-stock bubble in 2000–2002, the Federal Reserve needed another bubble. It lowered interest rates to the floor. In previous years, Congress had made many steps to encourage home ownership: tax breaks, creation of Fannie Mae and Freddie Mac to buy mortgages and sell them to investors. Politicians hyped home ownership of low-income families by encouraging issuance of subprime mortgages and peddling of them to investors. The country set itself up for a nuclear explosion: lenders didn’t care whether a borrower could afford a mortgage; after all, it would be sold to Wall Street and then to investors. The paper was peddled in the form of highly and deliberately complicated derivatives containing those mortgages.
San Diego, which had always had high home prices and moderate incomes, was on the leading edge — of the precipice. Citizens snapped up mortgages with teaser rates that would later balloon. San Diego became the capital of exotic mortgages. Foreclosures cascaded. Prices have plunged more than 40 percent since their 2005 peak — one of the biggest declines in the nation.
Now San Diegans’ stocks and home values are down 40 percent or more. And the government intends to prop up both. You may think that’s good news, but it’s bad news for long-term stability and sanity. Moral hazard makes it so.