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DISSENTING STATEMENTISSENTING STATEMENT
Commission focused thousands of staff hours on investigation, and not nearly
enough on analyzing these critical economic questions. The investigations were in
many cases productive and informative, but there should have been more balance be-
tween investigation and analysis.

Conclusions:

• The credit bubble was an essential cause of the financial crisis.
• Global capital flows lowered the price of capital in the United States and much
of Europe.
• Over time, investors lowered the return they required for risky investments.
Their preferences may have changed, they may have adopted an irrational bub-
ble mentality, or they may have mistakenly assumed that the world had become
safer. This inflated prices for risky assets.
• U.S. monetary policy may have contributed to the credit bubble but did not
cause it.

THE HOUSING BUBBLE
The housing bubble had two components: the actual homes and the mortgages that
financed them. We look briefly at each component and its possible causes.
There was a housing bubble in the United States—the price of U.S. housing in-
creased by more than could be explained by market developments. This included
both a national housing bubble and more concentrated regional bubbles in four
“Sand States”: California, Nevada, Arizona, and Florida.
Conventional wisdom is that a bubble is hard to spot while you’re in one, and
painfully obvious after it has burst. Even after the U.S. housing bubble burst, there is
no consensus on what caused it.
While we still don’t know the relative importance of the possible causes of the
housing bubble, we can at least identify some of the most important hypotheses:

• Population growth. Arizona, Florida, Nevada, and parts of California all expe-
rienced population growth that far exceeded the national average. More people
fueled more demand for houses.
• Land use restrictions. In some areas, local zoning rules and other land use re-
strictions, as well as natural barriers to building, made it hard to build new
houses to meet increased demand resulting from population growth. When
supply is constrained and demand increases, prices go up.
• Over-optimism. Even absent market fundamentals driving up prices, shared
expectations of future price increases can generate booms. This is the classic
explanation of a bubble.
• Easy financing. Nontraditional (and higher risk) mortgages made it easier for
potential homebuyers to borrow enough to buy more expensive homes. This
doesn’t mean they could afford those homes or future mortgage payments in