Paul Willen is a research economist at the Federal Reserve Bank of Boston. His big idea is that the key to the recent 2008 bubble was that people assumed housing prices couldn’t fall. Everything else really follows from that.
Lots of parties exacerbated the crisis by encouraging unqualified buyers to receive mortgages: investors, regulators, underwriters, politicians, non-profits, academics. None were essential, but it’s clearly interesting how many there were. If Willen is correct the focus shouldn’t be on these parties, guilty as they are, but rather, why it was conventional wisdom that housing had little aggregate year-over-year price risk. If we understand that question better it might be more fruitful than other correctives, because if everyone thinks an asset has zero risk, it seems probably that it will become risky (eg, see my Bayesian Mimicry post.
Just getting people to agree this was the conventional wisdom would be a great service, and I think academically feasible to demonstrate. With hindsight, fewer and fewer admit to thinking housing collateral had no risk. Others suspect that those who thought housing would rise forever were simply evil and self-interested, like Goldman’s Fabrice Tourre. I think that narrative is highly misleading.