The Subprime Boom: Was There a Silver Lining?


Krugman, today:

The explosion of “innovative”

home lending that took place in the middle years of this decade was an

unmitigated disaster…

I use the words “unmitigated disaster” advisedly.

Krugman says that the explosion in subprime lending did not broaden

homeownership, while it massively increased the number of people

burdened by debts they couldn’t afford, not to mention the “duped


There is another view. In a comment on one of my blog entries earlier

this month, the New Yorker’s Jim Surowiecki wrote:

I think that the subprime boom probably still has

created more winners than losers, but obviously it’s clear now that the

economic costs of the bust far outweigh the economic benefits of the


And another business-and-finance columnist, Dan Gross, has even

published an entire book

dedicated to the proposition that “bubbles are great for the economy”;

I don’t think he’s said that the credit bubble (of which the

subprime-mortgage bubble was a part) was any exception.

So, was the subprime boom an unmitigated disaster,

or did it have some redeeming features?

There is at least one class of undisputed winners, and that’s the

people who owned their homes and decided to up and leave the barrio

when their houses became worth more than their lifetime earnings. I

don’t know how many of those there are, but in general anybody who

owned a house at the beginning of the boom and who didn’t feel the need

to join in the cash-out-your-home-equity-and-spend-it-on-a-new-TV game

is now sitting on a gold mine, even if the value of their home does

fall back by 15%.

And then there’s the homebuilding industry, which during the boom years

was responsible for the employment of millions of contractors and

realtors and granite-countertop manufacturers and even journalists

working for glossy magazines full to bursting with ads for shiny new


But in general I think that most of the winners from this game were

beneficiaries of the housing boom generally, and not the boom in

subprime lending specifically. I’m with Krugman on this one: marginal

lending should happen at the margin, and it became altogether far too

easy and commonplace between 2004 and 2006. The housing

boom might have created more winners than losers; the subprime

boom, not so much.

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