During the 2005-2006 housing boom, a government loan was simply not necessary because the private markets were allocating resources to crowd out their government mortgage product. The banks provided lower cost alternatives with 100% financing, so it simply was not economical to use a government loan. There was adverse selection among banks to cream skim the 'opaque loans'.
FHA's market share increased dramatically as house prices crashed an private capital fled. The private markets were essentially acting perfectly cyclical to the economy, that I will argue is the opposite of capital flows from efficient allocators were doing. Because money was chasing the high returns creating a self fulfilling prophecy of higher and higher returns on capital, the most efficient capital with the best possible outcome is allocated at the bottom of the market.
If you had used leveraged (much like a home buyer uses leverage in obtaining a mortgage) your returns would have significantly outperformed some of the best corporations in the world, simply because your timing was right, while all corporations were teetering on the verge of bankruptcy.
If the Federal Reserve had not provided emergency liquidity measures to banks, companies, and foreign countries, the fallout would have been catastrophic. The crash of 2008 could have been (arguably) exponentially worse, and (arguably) more similar to the 'flash crash' of 2010; of course this hypothetical scenario occurs in theory only.
The rate of change in prices during the flash crash occurred over an insanely shorter time period, and buying opportunities were limited to those with super-computers and GTC orders in the system. The pyschological effect was not felt because of the speed of the flash crash. On the other-hand, the recession was analogous to the flash-crash but drawn out more slowly as banks reported flawed earnings and recognized the depreciated assets over a longer period of time.
Corporations should always behave similarly to FHA and take the most risk (FHA is always taking the riskiest traunch) at the bottom of the economic cycle. Banks and companies pulled back and caused the credit crunch because they had too much capital allocated at the top of the cycle. Psychological factors contribute to buy/sell decisions and do not always allocate capital efficiently. The government provides insurance liquidity as a last resort and arguably the most efficient capital flowing through the system is being cherry picked at the bottom.
Figure 1:
<http://economix.blogs.nytimes.com/2011/01/10/federal-reserve-worlds-most-profitable-bank/>
If you had used leveraged (much like a home buyer uses leverage in obtaining a mortgage) your returns would have significantly outperformed some of the best corporations in the world, simply because your timing was right, while all corporations were teetering on the verge of bankruptcy.
If the Federal Reserve had not provided emergency liquidity measures to banks, companies, and foreign countries, the fallout would have been catastrophic. The crash of 2008 could have been (arguably) exponentially worse, and (arguably) more similar to the 'flash crash' of 2010; of course this hypothetical scenario occurs in theory only.
The rate of change in prices during the flash crash occurred over an insanely shorter time period, and buying opportunities were limited to those with super-computers and GTC orders in the system. The pyschological effect was not felt because of the speed of the flash crash. On the other-hand, the recession was analogous to the flash-crash but drawn out more slowly as banks reported flawed earnings and recognized the depreciated assets over a longer period of time.
Corporations should always behave similarly to FHA and take the most risk (FHA is always taking the riskiest traunch) at the bottom of the economic cycle. Banks and companies pulled back and caused the credit crunch because they had too much capital allocated at the top of the cycle. Psychological factors contribute to buy/sell decisions and do not always allocate capital efficiently. The government provides insurance liquidity as a last resort and arguably the most efficient capital flowing through the system is being cherry picked at the bottom.
Figure 1:
<http://economix.blogs.nytimes.com/2011/01/10/federal-reserve-worlds-most-profitable-bank/>
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