Five years later, still no firm answers on what caused the financial crisis

Take the popular notion that banks and investment banks (“Wall Street”) knowingly packaged bad home mortgages in securities that were then sold to unsuspecting investors. The bankers, the story goes, understood that there was a housing bubble — that prices would crash and defaults explode — but peddled bad loans because it made them rich.

Although this happened, it was the exception, not the rule. That’s the conclusion of a study by economists at the University of Michigan and Princeton. They reasoned that if the investment bankers packaging mortgages expected a housing collapse, they would have been careful in their own home purchases. So the economists compared the bankers’ home-buying with that of lawyers and stock analysts who lacked specialized housing knowledge. The study, published by the National Bureau of Economic Research, found that the bankers showed little “awareness of a housing bubble and impending crash.” During the boom, they bought larger homes and second homes. Compared to the lawyers and stock analysts, their housing purchases fared “significantly worse.”

What explains their lapse? Probably this: Before the real estate collapse, there was a widespread belief that housing prices would rise indefinitely, preventing (by definition) a bubble. We now know this belief was mistaken, stupid and suicidal. But for many, it was genuine. An earlier study by economists at the Boston Federal Reserve reached a similar conclusion.