The Subprime Boom: Was There a Silver Lining?

Paul 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 investors".

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 boom.

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 condos.

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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