The financial crisis still dominates the mindset of many callers when I go on the radio. It is also interesting teaching a new crop of students this year. Many of them are at that age where they were just starting to pay attention to business, the economy, and public affairs when the crisis hit. That is to say, it is really all they know that is not from a history book. As a result the start of the banking class this year has discussed the crisis quite a bit. One of the discussions we had recently  was about banks attempting to cash in on the increased value of homes.

We have all seen the home price data so I will not bore you with that data again. Instead I will show this in a different way. The home price increases led to increases in homeowners equity. This increased equity was what banks wanted to share in, and the change in business practices ensued. Originate to distribute became the dominant business model.

Homeowner’s Equity

It is interesting to note that the recent increase in equity only returns us to the level from the start of 2004. We saw essentially the erasure of exactly all the equity built up in the first part of the last decade. Was all that increased equity an illusion? If not, then some of the decline was overkill. How much though? It is not completely clear at this point.

This is why I ask what we benchmark against. It makes policy analysis and forecasting difficult at best when you cannot determine whether the values of your economic variables were accurate, inflated, or outright fiction.

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