The Swarm

Mix it up with The Bee's editorial board.

November 25, 2008
Why we're in this economic mess ... and how to get out of it

If you want to make sense of the roots of the economic crisis and the giant, still unaddressed issue of housing, see the Nov. 13 testimony of Susan Wachter of the Wharton School at the University of Pennsylvania before the U.S. Senate Committee on Banking, Housing and Urban Affairs (she's at 65:47 minutes into the hearing). You can also read her testimony:


Early in the 1990 decade, nonprime lending was insignificant; by 2006 nonprime lending constituted 47 percent of mortgage originations.  The unprecedented expansion of poorly underwritten credit induced and supported a U.S. housing asset bubble beginning in 2003...


And, she continues,


This weakening of lending standards, coupled with increased production, resulted in mortgages which were structured to fail, even in the absence of intent or fraud.  However, fraudulent lending also did increase.  Eventually, this process became unsustainable, price increases halted, and the poorly underwritten loans could not be rescued by high and ever-increasing prices.  This led to today's system breakdown.


The roots of the economic downturn are in housing, so solutions need to be focused there:


Even with the efforts to solve our banking liquidity problems, we will not solve the prevailing problem if the housing downturn continues and the house market decline shows no sign of abating.  Moreover, despite bank recapitalization and rescue efforts, economically rational loan modifications that would help stabilize the market are not occurring.


So while housing prices need to fall to some real value level, the danger now is price declines that are too big:


Since their peak in 2006, housing values have fallen over 20 percent so far.  While another 10 percent fall brings the index to 2003 levels, price declines may far exceed this decline...


The solution is loan modifications.  Yet they are not happening the scale necessary in order to assure a market turnaround at fundamental levels instead of a severe overcorrection.


She concludes that:


Voluntary efforts are not working.  The rules of the game need to change.

Are members of Congress and members of the California Legislature listening?

About Comments

Reader comments on are the opinions of the writer, not The Sacramento Bee. If you see an objectionable comment, click the "report abuse" button below it. We will delete comments containing inappropriate links, obscenities, hate speech, and personal attacks. Flagrant or repeat violators will be banned. See more about comments here.

What You Should Know About Comments on is happy to provide a forum for reader interaction, discussion, feedback and reaction to our stories. However, we reserve the right to delete inappropriate comments or ban users who can't play nice. (See our full terms of service here.)

Here are some rules of the road:

• Keep your comments civil. Don't insult one another or the subjects of our articles. If you think a comment violates our guidelines click the "report abuse" button to notify the moderators. Responding to the comment will only encourage bad behavior.

• Don't use profanities, vulgarities or hate speech. This is a general interest news site. Sometimes, there are children present. Don't say anything in a way you wouldn't want your own child to hear.

• Do not attack other users; focus your comments on issues, not individuals.

• Stay on topic. Only post comments relevant to the article at hand. If you want to discuss an issue with a specific user, click on his profile name and send him a direct message.

• Do not copy and paste outside material into the comment box.

• Don't repeat the same comment over and over. We heard you the first time.

• Do not use the commenting system for advertising. That's spam and it isn't allowed.

• Don't use all capital letters. That's akin to yelling and not appreciated by the audience.

You should also know that The Sacramento Bee does not screen comments before they are posted. You are more likely to see inappropriate comments before our staff does, so we ask that you click the "report abuse" button to submit those comments for moderator review. You also may notify us via email at Note the headline on which the comment is made and tell us the profile name of the user who made the comment. Remember, comment moderation is subjective. You may find some material objectionable that we won't and vice versa.

If you submit a comment, the user name of your account will appear along with it. Users cannot remove their own comments once they have submitted them, but you may ask our staff to retract one of your comments by sending an email to Again, make sure you note the headline on which the comment is made and tell us your profile name.

hide comments

On October 14, The Sacramento Bee will temporarily remove commenting from While we design the upgrade, we encourage you to tell us what you like and don't like about commenting on and other websites. We've heard from hundreds of you already and we're listening. Please continue to add your thoughts and questions here. We also encourage you to write Letters to the Editor on this and other topics.

About The Swarm

The Swarm is written by members of The Sacramento Bee's editorial board. They meet daily and are separate from the newsroom. Views included here are those of individual writers, and do not necessarily reflect those of a majority of the board or the positions expressed in The Bee's editorials.

October 2013

Sun Mon Tue Wed Thu Fri Sat
    1 2 3 4 5
6 7 8 9 10 11 12
13 14 15 16 17 18 19
20 21 22 23 24 25 26
27 28 29 30 31    

Stuart Leavenworth on Twitter

Follow "SacBeeEditBoard" on Twitter