张家瑞 博士， 宁诺商学院经济学助理教授
Dr Jiarui Zhang ,Assistant Professor in Economics, NUBS China
Fascinating Frontiers of Economic Research
What are economists doing? Are there any interesting findings in their research? Can we learn something useful from their thoughts?
In this column, once a week, I will introduce an economic research paper that is interesting and at the frontiers of research. It may investigate human behaviour or human nature; it may study firm operations and management, it may be about research on financial markets and asset prices; it might discuss macroeconomic dynamics and economic policies; it may also investigate incentives and institutional design, or even summarise the history of economic development, or other topics. Regardless, I hope that you will find the topic interesting and useful.
Of course, limited by my own ability, there may be errors, omissions, and biased understandings. While all the responsibilities are mine, I hope to extend the discussion of these interesting papers with your comments and feedback.
那么问题来了，这场金融危机的罪魁祸首到底是谁呢？虽然已经过了13年，但学术界仍一直为这个问题争论不休。秋后算账，到底谁应该为这场危机埋单？今天分享的这篇文章就是2020年发表在全球顶级经济学期刊 Journal of Political Economy 上的很有代表性的一篇文章。这篇文章仔细地分析了2008年前后美国住房抵押贷款市场以及居民的借贷行为。它构造了一个系统性的一般均衡模型，并且通过数值模拟的方式来判断各种“外生变量”对房价的影响程度。在这个模型中，居民可以选择买房，也可以选择租房。买房需要贷款，而贷款成本取决于一些条件，比如说首付比例，收入水平等等，这些因素会决定一个人的信用能力，从而决定他贷款的成本。那么这个模型中一个人什么情况下选择租房子，什么情况下选择买房子呢？买房虽然比租房更幸福一些，但租房不用贷款，而买房要贷款，因此买房可能导致的成本也更高一些。对比来看，是否买房子一方面取决于这个人的年龄和收入水平，以及当下的贷款条件（比如说首付比例的要求），更重要的是还取决于人们对房价走势的预期。如果大家都预期房价要上涨，那么赶紧买房不仅成本更低，而且还可能有资产增值的好处。
总之，这篇文章最后分别研究了三个“外生冲击”对房价的影响。这三个“外生冲击”分别是：居民收入突然增长了（例如因为技术突然进步了），贷款条件突然放松了（例如要求的首付比例突然下调了），以及人们突然预期房价要上涨了。其结论是：相比较而言，收入增加和贷款条件放松对房价上涨的作用微乎其微，因为这两个因素并不会大幅度刺激人们买房的需求。人们并不会因为收入增加一点或者首付比例下降一点就急忙贷款买房子。然而，预期的改变则对房价上涨有特别重要的作用。人们一旦预期房价要涨，特别是所有人都预期房价要涨，那他们还不赶紧贷款买房子，坐等资本增值的好处么？作者指出，正是因为美国全社会对房价走势的预期在2003至2005年之间突然变了，变得特别乐观，人们才疯狂买房，房价才真的大幅上涨。同样也是因为人们对房价的预期在2007年出现了180度大拐弯，人们又开始疯狂卖房，贷款也开始违约，这才出现了房价跳水和金融危机。为了辅助这个论点，作者还找到了一些论据，例如美国的全国住房建筑商协会（National Association of Home Builders）每个月发布的房地产市场情绪指数就表明，人们对美国房地产市场的情绪在2002~2005年之间越发高涨和亢奋，果然表明大家都一致看好房市。而2005年这个情绪达到顶点后开始掉头向下，也预示了即将到来的泡沫破灭。
有意思的是，在事后清算中，美联储不愿意承认自己货币政策失误。他们的工作人员连续发表了很多文章，将房价泡沫归因于老百姓不理智，归因于华尔街缺乏金融监管，归因于评级机构失职等等。可是拜托，这世界没有无缘无故的丧失理智，也没有无缘无故的乐观评级。正如货币政策学家，著名的“泰勒规则”提出者约翰 · 泰勒在2012年就指出的，一切都是极度宽松的货币政策环境催化出来的。
参考文献：Greg Kaplan, Kurt Mitman, and Giovanni L. Violante，2020，" The Housing Boom and Bust: Model Meets Evidence", Journal of Political Economy, Vol. 128, No. 9.
Fascinating Frontiers in Economics - Housing Bubble and Bust: When Model Meets Evidence
(Keywords: Macroeconomics, Financial Crisis)
As we all know, the subprime mortgage crisis erupted in the United States in 2008, and the core of this financial storm was its housing market. The ratio of house prices to per capita income in the U.S. used to fluctuate in a small range of around 3.3. However, from the end of 2001, the ratio suddenly climbed and reached a periodic peak of 5.0 around 2007, it suddenly reversed in a downward trend (as shown in the chart below).
The Ratio of US Median House Prices to Per Capita Income (Source: CEIC)
Along with the dramatic rise in housing prices, growing American residents joined the crowd of house buyers. Americans have a low savings rate, therefore, to buy a house, mortgage loans from banks were sought. The banks felt that the risk on mortgages was low since house prices were rising and even if the borrowers defaulted, the value of the homes they could repossess was still rising. At the same time, they used their spare capital and a financial derivative called Mortgage-Backed Securitization (MBS) to package these mortgage loans into securities. The cash they got back from selling MBS was used to lend to more people. Therefore, as the risk of mortgage default had been transferred to others, the lending standard of mortgages became much looser – from requiring borrowers to provide an income certificate and a 20% down payment, allowing zero down payment waiving of mortgage repayments for the first six months. The latter kind of mortgage deal was almost "crazy" lending, otherwise known as subprime mortgages. Why were banks willing to lend to people who were otherwise not qualified? The possible reasons were rising house prices and the selling of securitized risky subprime loans. In this way, it did not matter to the banks that the people who got the loans may default since the bank transferred the risk away.
Slide up for more details.
As a result, residents were willing to borrow, banks were willing to lend, and Wall Street was willing to pay for it. Therefore, a self-fulfilling housing bubble was created. It wasn’t until 2007, when widespread and large scale defaults occurred in the U.S., that everyone panicked and wondered who was still holding subprime mortgage-backed securities. Under the fire sale, the Wall Street financial giants Bear Stearns and Lehman Brothers collapsed, and other financial institutions also plunged into crisis. House prices began to plummet, and the eventual Financial Crisis erupted.
Who is to blame for the Financial Crisis? It has been 13 years since the crisis broke out, but the academic world is still debating this question. After all, who should pay for the crisis? The article shared today is a representative one published in 2020 in the Journal of Political Economy , a top global economic journal. This article carefully analysed the U.S. home mortgage market and residents' borrowing behaviour around 2008. It constructs a systematic general equilibrium model and uses numerical simulations to determine the extent to which various "exogenous variables" affect house prices. In this model, residents can choose to buy a house or rent a house. Buying a house requires a loan, and the cost of the loan depends on certain conditions, such as the down payment ratio, income level and so on. These factors will determine a person's credit score, which will determine the cost of the loan. So, in this model, when does a person choose to rent a house and choose to buy a house? Although buying a house is more ideal than renting, the latter does not require a loan while buying a house does. Thus, the cost of buying a house is higher. The decision to buy a house depends not only on the person's age and income level, but also on current mortgage conditions (such as down-payment requirements), and more importantly, on people's expectations of where house prices are going. If prices are expected to rise, it is not only cheaper to buy a house earlier, but it may also bring capital gains.
The research paper finally studies the impact of three "exogenous shocks" on house prices. The three "exogenous shocks" are a sudden increase in household incomes (such as sudden technological advances), a premature easing of credit conditions (for example, a sudden reduction in down-payment requirements), and a sudden change of expectations about house prices. The paper concluded that rising incomes and more comfortable credit conditions had a relatively small impact on house prices because they do not stimulate much demand for houses. People are not rushing to buy a house just because their income has gone up a little or the required level of a down payment has gone down a little. A change in expectations, however, played a particularly important role in house price inflation. If people expect house prices to go up, especially the majority of the population, why not just take out a loan to buy a house, and wait for the benefit of capital appreciation? The authors point out that it was because American society's expectation became very optimistic about the direction of house prices suddenly changing between 2003 and 2005, that people bought houses actively, leading to sharp rises in house prices. It was also because of people's expectations that house prices took a U-turn in 2007, when people started selling houses frantically and defaulting on their loans. This led to house prices plunging, and thus the financial crisis began. To support this argument, the authors looked for evidence such as the National Association of Home Builders' monthly index of housing sentiment, which showed that sentiment toward the U.S. housing market grew higher between 2002 and 2005, suggesting a consensus of optimism. That sentiment peaked in 2005 and began to turn downward, heralding the coming bust.
Comments: What can we say about this research and its conclusions? Well, the logic of the article is impeccable. In China, there is a saying that we should buy a house when its value is rising. If everyone expects house prices to go up, people will naturally rush to buy one, leading to self-fulfilment of expectations, and house prices will actually rise. The lending conditions did not really seem to have much of an effect on the demand for houses. It does not matter whether the down payment ratio is 20% or 70%, as long as we can make money out of the house that is invested in, we will take out a loan. But is it really that simple? The authors of this article seem to have forgotten an important logical premise – why between 2002 and 2005, did people's expectations about the trend of house prices suddenly change? Why was it that everyone was so suddenly bullish about houses? In the midst of rising house prices, why did expectations suddenly reverse in 2007? Is it really what Keynes said that it was all because people have "animal spirits" and therefore go "mad" from time to time?
“Animal spirits” is a hypothesis that people are not rational. One day they are suddenly optimistic, and then the next day they become much pessimistic, bringing about a changing mood and thus economic fluctuations. It was the animal spirits of ordinary people that led Keynes to point out the need for rational government policy to fine-tune fluctuations. Regardless of whether the animal spirits hypothesis is correct or not, it is not very convincing to say that the mood of the entire American population at the same time, in the same place, changed to become so optimistic about real estate. Some people may argue that although ordinary households do not know much about real estate, they can read financial institutions' reports. When financial institutions say that house prices will rise, people believe them. Is it possible that the financial institutions fooled people into thinking that house prices were going up so that they could make money by making loans and selling all those derivatives? Of course, it is possible. Wall Street is greedy and financial institutions want to make money. But why did they become greedy only after 2002? Wall Street has always been greedy, and those tricks of subprime lending and subprime MBS are not new since they've been introduced in the United States in the 1970s. Why did Wall Street wait until after 2002 to start making money off these things?
Obviously, something else must have happened around 2002. It caused a change in sentiment, a change in expectations, and a miscalculation on Wall Street institutions and investors. If there were such a thing, it would have broken the crazy fantasy and behaviour patterns around 2007, leading to the bubble bursting and the financial crisis. In fact, I co-authored with Professor Xu Xiaonian from China Europe International Business School in a research paper. We found a real change in the US Federal Reserve’s monetary policy in 2001.
The Federal Reserve's Benchmark Interest Rate
We are accustomed to what followed, as the Fed once again did everything in its power to prop up the market. They cut the interest rate to 0.25%, where it stayed for more than a decade. If a low-interest rate was not helping, Quantitative Easing (QE), commonly known as “a helicopter drop of money” was introduced. If QE did not work, then the Fed directly purchased the toxic assets. The Federal Reserve was acting like a fireman, frantically trying to put out the fires and salvage the damage, and finally, we have already seen US house prices rise again after a "brief" crash, and well past their pre-crisis levels of 2008. The US stock market also ushered in a multi-year super bull market after the crisis. People thank the Fed, the fire chief. But who would have thought that it was the fire chief who started the fire?
Interestingly, in a post-mortem reckoning, the Fed has been reluctant to admit to monetary misconduct. Their staff have published a series of articles attributing the housing bubble to people's irrationality, the lack of financial regulation on Wall Street, the failure of the rating agencies, and so on. But there is no such thing as gratuitous insanity or gratuitous optimism. As John Taylor, a monetary policy economist and the famous author of the "Taylor Rule" pointed out in 2012, that the too loose monetary environment has catalysed all this.
Academic arguments are not absolutes, but I'm just offering you some possibilities. Different people have different opinions. I hope the above sharing and discussion can be helpful to you. If you are interested, you can find more evidence to support your argument.
Finally, back to the article shared today, it has some beneficial advantages. Especially for academic modelling, it has a lot of innovative designs. For example, in the model, people's life is limited. Simultaneously, the length of the mortgage is long-term (which is different from the loans in many traditional macroeconomic models), in which people can either buy a house or rent a house, etc. It is believed that these modelling techniques will be of some help to academic research in related fields. But the model does not involve monetary policy, and the cost of borrowing does not involve interest rates. These are the most significant flaws of this article.
Original Paper: Greg Kaplan, Kurt Mitman, and Giovanni L. Violante, 2020, " The Housing Boom and Bust: Model Meets Evidence", Journal of Political Economy, Vol. 128, No. 9.
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