A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

THE U.S. HOUSING BUBBLE AND
CRASH OF THE EARLY 2000s
Although the Internet bubble may have been the biggest
stock-market bubble in the United States, the bubble in
single-family home prices that inflated during the early years
of the new millennium was undoubtedly the biggest U.S. real
estate bubble of all time. Moreover, the boom and later
collapse in house prices had far greater significance for the

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average American than any gyrations in the stock market. The
single-family home represents the largest asset in the
portfolios of most ordinary investors, so falling home prices
have an immediate impact on family wealth and sense of well-
being. The deflation of the housing bubble almost brought
down the U.S. (as well as the international) financial system
and ushered in a sharp and painful worldwide recession. In
order to understand how this bubble was financed and why it
created such far-reaching collateral damage, we need to
understand the fundamental changes in the banking and
financial systems.
A story I like to tell concerns a middle-aged woman who
has a serious heart attack. As she is lying in the emergency
room, she has a near-death experience in which she comes
face to face with God. “Is this it?” she asks. “Am I about to
die?” God assures her that she will survive and that she has
thirty more years to live. Sure enough, she does survive, gets
stents put in to open up her clogged arteries, and feels better
than ever. She then says to herself, “If I have thirty more
years to live, I might as well make the most of it.” And since
she’s already in the hospital, she decides to undergo what
might charitably be called “comprehensive cosmetic surgery.”

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Now she looks and feels great. With a jaunty step she bounds
out of the hospital, only to be hit by a speeding ambulance
and instantly killed. She goes to the Pearly Gates and again
meets God. “What happened?” she asks. “I thought I had
thirty more years to live.” “I’m terribly sorry, Madam,” God
responds. “I didn’t recognize you.”