At the start of the current recession, the consensus view was that it would be a short and shallow one lasting some eight or nine months, like the recessions in 1990-91 and 2001.
Nouriel Roubini and other "doomsters" (such as me) argued that the recession would be deep and long-lasting, and we have been proved right so far. Roubini argued that the recession would last 24 months, and we are more than 10 months beyond the consensus forecast at the time the recession started - and have only some 5 months left of the recession, according to Roubini's forecast. My view is that the recession could end very soon if the US Congress tackles the key issues of the ack of transparency, the multiplication of leveraged speculation, and the speculation (about which I have written and spoken extensively, most recently by invitation at the Israeli Chambers of Commerce in Israel).
The US Congress is debating those very issues right now - and the question is whether or not they choose to address those issues at least as vigorously as suggested by the Obama proposals. In my articles published in the New York Times Online ("DealBook" section) a couple of weeks ago, I have argued that a more vigorous approach would be even better. But at least the response of Congress should be no weaker. Provided that were to be so, then the recession could end within days.
HOWEVER, THE END OF THE RECESSION IS NOT THE SAME THING AS A RECOVERY.
Whether we see sustained recovery depends on further factors, specifically how quickly employement returns to the US economy, and how quickly the US consumer is able to and does starts$ spending again - but this time out of savings, not merely by increasing debt!
Households in the US are already overloaded with debt, as is the corporate sector, and of course also the government with its now unbelievably massive fiscal and public debt.
A renewed bout of recession will therefore remain as a risk. The "bottoming out of the recession" has been based entirely on governments' unsustainable explosion in monetary and fiscal easing - and it will not be easy to get the timing and size of the withdrawal right.
Fundamental questions remain to be answered about the nature of the global economic system that we have at present. I have argued consistently over several years that the human and ecological consequences of the current economic system are set to destroy humanity - much sooner than consensus predictions have indicated even recently.
At the very minimum, questions of ecology and social justice need to be integrated into global economic and financial rules. It is just possible that we may still succceed in the first (environmental issues) at the Copenhagen conference this year. There are also attempts to renew the Doha round to get the WTO talks going again - and, if so, there will be a chance to get issues of worldwide social justice included in any new WTO treaty. However, these represent more or less our last chances to tackle these issues. Ideally, we should go beyond the ecological and social issues to the psychological, cultural and spiritual issues that are at the heart of the repeated crises that are endemic to the nature of the current economic system.
Some of us have already been addressing those issues for ages, others of us have begun to address those issues more recently, and I hope and pray and wish that all of us may begin to see and address these issues urgently and as soon as possible.
Sphere: Related Content
Thursday, July 16, 2009
Wednesday, July 15, 2009
Is an FDR-type "bank holiday" on the cards?
The Blogosphere has been busy with a lot of chat on the subject. Roughly half the hits for a Google search for "fdr bank holiday" show up on a search for "fdr bank holiday 2009".
I'll tell you what interested me:
http://www.newyorkfed.org/research/epr/09v15n1/0907silb.pdf
If I was Obama, and I had this at all in mind, I would have acted on this by now.
Of course, it is possible that the administration's judgment is that the public needs to be prepared before such a move is made, whenever that may be necessary.
Should that be the case, then it would of course be useful to encourage extensive discussion of this on the Blogosphere before drawing more traditional media into the discussion, and finally announcing such an actual move.
However, a week is a long time in politics and it remains to be seen whether such a drastic move will be thought necessary. Because the consequences will not be pretty: in 1933, the US was pretty isolated from the rest of the world, and vice versa....
It is doubtful if the result would stop at greater bank & system control, fewer banks & a lower US Dollar. The impact on US Treasuries, and on Emerging Markets would be terrible.
Greater bank and system control is already being sought by legislation being considered by the US Congress. Banks are going out of business by the day, though that gets hardly any publicity. And a lower Dollar can be more predictably and efficiently obtained by other measures.
So the supposed main advantages of a "bank holiday" are already on the way to being obtained (we hope!). Any additional advanatages of such a possible move are more uncertain than in 1933. And the disadvantages of a "bank holiday" might be horrendous. Sphere: Related Content
I'll tell you what interested me:
http://www.newyorkfed.org/research/epr/09v15n1/0907silb.pdf
If I was Obama, and I had this at all in mind, I would have acted on this by now.
Of course, it is possible that the administration's judgment is that the public needs to be prepared before such a move is made, whenever that may be necessary.
Should that be the case, then it would of course be useful to encourage extensive discussion of this on the Blogosphere before drawing more traditional media into the discussion, and finally announcing such an actual move.
However, a week is a long time in politics and it remains to be seen whether such a drastic move will be thought necessary. Because the consequences will not be pretty: in 1933, the US was pretty isolated from the rest of the world, and vice versa....
It is doubtful if the result would stop at greater bank & system control, fewer banks & a lower US Dollar. The impact on US Treasuries, and on Emerging Markets would be terrible.
Greater bank and system control is already being sought by legislation being considered by the US Congress. Banks are going out of business by the day, though that gets hardly any publicity. And a lower Dollar can be more predictably and efficiently obtained by other measures.
So the supposed main advantages of a "bank holiday" are already on the way to being obtained (we hope!). Any additional advanatages of such a possible move are more uncertain than in 1933. And the disadvantages of a "bank holiday" might be horrendous. Sphere: Related Content
UK Government Minister's behaviour descends to new low in the battle regarding public broadcasting
Ben Bradshaw, the UK Culture Secretary, is thoroughly emotionally-committed to the so-called "Digital Brain" proposals which include, among other things, the idea that the Licence Fee, which is paid by everyone in the UK who owns a TV, should be shared by organisations other than the BBC (at present, the Fee goes entirely to the BBC; this is because other organisations are expected to raise their funding from the market).
In an interview with the Financial Times yesterday, Mr. Bradshaw described the leadership of Mark Thompson, the BBC director-general, and of Sir Michael Lyons, chairman of the BBC Trust, as “wrong-headed” and claimed not only that opposition to government plans to share some of the licence fee with rival broadcasters was “self-defeating” but even that the BBC staff themselves were in favour of the Bradshaw proposals - something whose veracity can easily be checked, if necessary, but is wholly denied by Mr Thompson, who says that he has "seen absolutely no evidence that the BBC is anything other than fully united" against the Bradshaw proposals.
Splitting the licence fee is a move designed to weaken public broadcasting in the UK and, as the BBC is the premier broadcasting organisation in the world, that would have tremendous negative consequences on public broadcasting around the world - as well as on the future of democracy, as I have argued elsewhere. What is needed, rather, is to strengthen public broadcasting.
The BBC is not a perfect organisation, but it is an important bastion of human and humane values - and it is open to public scrutiny in a way that few other media organisations are.
Splitting the licence fee would undoubtedly lead in time to using the licence fee for wider purposes that are at present supported by general taxation.
The net effect of would be a continued weakening of the BBC, and eventual loss of independence from market forces for the BBC.
In any case, the Culture Secretary has indulged in uncultured behaviour in descending to personal attacks on Mr Thompson and Sir Michael.
We all have uncontrolled moments, so I do not call for Mr. Bradshaw's resignation. However, I do call on him to apologise to Mr. Thompson and Sir Michael.
And I call on him to withdraw the thoroughly damaging proposal that the Licence Fee be shared by other organisations whose role historically has been, and is today, to raise their funding from the financial and advertising markets. Sphere: Related Content
In an interview with the Financial Times yesterday, Mr. Bradshaw described the leadership of Mark Thompson, the BBC director-general, and of Sir Michael Lyons, chairman of the BBC Trust, as “wrong-headed” and claimed not only that opposition to government plans to share some of the licence fee with rival broadcasters was “self-defeating” but even that the BBC staff themselves were in favour of the Bradshaw proposals - something whose veracity can easily be checked, if necessary, but is wholly denied by Mr Thompson, who says that he has "seen absolutely no evidence that the BBC is anything other than fully united" against the Bradshaw proposals.
Splitting the licence fee is a move designed to weaken public broadcasting in the UK and, as the BBC is the premier broadcasting organisation in the world, that would have tremendous negative consequences on public broadcasting around the world - as well as on the future of democracy, as I have argued elsewhere. What is needed, rather, is to strengthen public broadcasting.
The BBC is not a perfect organisation, but it is an important bastion of human and humane values - and it is open to public scrutiny in a way that few other media organisations are.
Splitting the licence fee would undoubtedly lead in time to using the licence fee for wider purposes that are at present supported by general taxation.
The net effect of would be a continued weakening of the BBC, and eventual loss of independence from market forces for the BBC.
In any case, the Culture Secretary has indulged in uncultured behaviour in descending to personal attacks on Mr Thompson and Sir Michael.
We all have uncontrolled moments, so I do not call for Mr. Bradshaw's resignation. However, I do call on him to apologise to Mr. Thompson and Sir Michael.
And I call on him to withdraw the thoroughly damaging proposal that the Licence Fee be shared by other organisations whose role historically has been, and is today, to raise their funding from the financial and advertising markets. Sphere: Related Content
They may or may not be politically or selfishly motivated, but they agree with the Guptara plan for financial systemic risk oversight
This morning's Financial Times reports that a coalition of investors, analysts and ex-regulators makes proposals very similar to mine, regarding how best to monitor financial systemic risk (that is, the risk of global recession). See: http://www.ft.com/cms/s/0/b3f6718a-70c2-11de-9717-00144feabdc0.html?nclick_check=1
I have not seen the 39-page document prepared by the group. Apparently, FT has seen it.
The FT's summary is that the document calls for the creation of an independent body ("the Systemic Risk Oversight Regulator" - horrible name!)to police risks across the financial sector, with full-time staff led by a chairman and four members appointed by the president and confirmed by the Senate, accountable to Congress. William Donaldson, a co-chair with fellow former SEC head Arthur Levitt of the Investors’ Working Group, told the FT the new agency should have “carte blanche to go everywhere it wants . . . to find systemically weak areas within the system”.
All these are exactly in line with the proposals I made in the New York Times DealBook section on 30 June: http://dealbook.blogs.nytimes.com/2009/06/30/another-view-a-global-approach-to-financial-risk/
The earlier piece, also published by the DealBook section of the NYT, evaluating the Obama proposals as a whole, is at: http://dealbook.blogs.nytimes.com/2009/06/25/another-view-flaws-in-the-obama-oversight-plan Sphere: Related Content
I have not seen the 39-page document prepared by the group. Apparently, FT has seen it.
The FT's summary is that the document calls for the creation of an independent body ("the Systemic Risk Oversight Regulator" - horrible name!)to police risks across the financial sector, with full-time staff led by a chairman and four members appointed by the president and confirmed by the Senate, accountable to Congress. William Donaldson, a co-chair with fellow former SEC head Arthur Levitt of the Investors’ Working Group, told the FT the new agency should have “carte blanche to go everywhere it wants . . . to find systemically weak areas within the system”.
All these are exactly in line with the proposals I made in the New York Times DealBook section on 30 June: http://dealbook.blogs.nytimes.com/2009/06/30/another-view-a-global-approach-to-financial-risk/
The earlier piece, also published by the DealBook section of the NYT, evaluating the Obama proposals as a whole, is at: http://dealbook.blogs.nytimes.com/2009/06/25/another-view-flaws-in-the-obama-oversight-plan Sphere: Related Content
Monday, July 13, 2009
The state-organised looting of the US taxpayer
The Congressional Oversight Panel's Report for this month (July) focuses on the issue of what the right price is for repurchases of TARP warrants.
You may recollect that TARP (The Troubled Asset Relief Program) was created by the US government to purchase assets and equity from financial institutions in order to save them from possible bankruptcy (TARP is the largest component of the steps taken by the government last year). TARP Warrants are simply the Warrants that were issued to purchase the troubled financial institutions' assets and equity. As the economy stabilises and these banks' financial situation improves, these institutions naturally want to repurchase their assets and equity in order to free themselves from government influence and interference. The question is: what is the right price for these Warrants?
In its Report, the Panel report compares its estimates with other estimates, based on high, low, and best assumptions for key variables.
Applying its calculatons to the warrant repurchases by eleven banks that have already been approved by the US Treasury, the Panel estimates that the price paid was only 66% of the Panel's best estimate of their value.
Concretely, the Panel estimates that an additional US$10 million should have been paid.
In other words, that is US$10 million that the taxpayer should have received and has not received.
Naturally, the question of what the "correct" price is for such warrants is a ticklish one.
The simplest way of settling the question would be to let market forces have their way. Here is an important product for which there is a worldwide market. No need for the US Administration to distort that market.
Let there be auctions.
That is the only way to ensure that the taxpayer does not continue to be looted. Sphere: Related Content
You may recollect that TARP (The Troubled Asset Relief Program) was created by the US government to purchase assets and equity from financial institutions in order to save them from possible bankruptcy (TARP is the largest component of the steps taken by the government last year). TARP Warrants are simply the Warrants that were issued to purchase the troubled financial institutions' assets and equity. As the economy stabilises and these banks' financial situation improves, these institutions naturally want to repurchase their assets and equity in order to free themselves from government influence and interference. The question is: what is the right price for these Warrants?
In its Report, the Panel report compares its estimates with other estimates, based on high, low, and best assumptions for key variables.
Applying its calculatons to the warrant repurchases by eleven banks that have already been approved by the US Treasury, the Panel estimates that the price paid was only 66% of the Panel's best estimate of their value.
Concretely, the Panel estimates that an additional US$10 million should have been paid.
In other words, that is US$10 million that the taxpayer should have received and has not received.
Naturally, the question of what the "correct" price is for such warrants is a ticklish one.
The simplest way of settling the question would be to let market forces have their way. Here is an important product for which there is a worldwide market. No need for the US Administration to distort that market.
Let there be auctions.
That is the only way to ensure that the taxpayer does not continue to be looted. Sphere: Related Content
Sunday, July 12, 2009
A friend asks: Is development more powerful than religion?
Responding to my post titled: "Why would 6 out of 10 Muslims oppose building a mosque in their area?", a friend asks: "Is development more powerful than religion?"
My response: Almost all religions have been anti-development. The exceptions are Judaism, Buddhism, and Protestantism - and (because I consider them religions too), Marxism and Casino Captialism of the sort that emerged with President Reagan and Mrs Thatcher).
Of these, the only ones that produced development without any negative effects were Early Buddhism and the Radical Reformation (i.e. the Radical Protestants).
Buddhism's developmental impact declined once it started being corrupted into the various forms it takes today (excluding Reformed or Christianised Buddhism in the West).
Islam, on the other hand, has had a mixed history. Whenever Islam has been open to non-Islamic views, it has been pro-development. However, Islam has at various times in different parts of the globe, turne in on itself and become what has been called "Islamist". That kind of Islam has always been anti-development.
In fact, development has taken the fangs from most traditional relgiions. Judaism and Radical Protestantism (Evangelicalism) produced the modern world. But Radical Protestantism is what thrives best in it - if measured by the rate of growth of the religion concerned.
Of course, Evangelicalism also produces its own corruptions. Which is why I am not an evangelical but a simple follower of Jesus the Lord. Sphere: Related Content
My response: Almost all religions have been anti-development. The exceptions are Judaism, Buddhism, and Protestantism - and (because I consider them religions too), Marxism and Casino Captialism of the sort that emerged with President Reagan and Mrs Thatcher).
Of these, the only ones that produced development without any negative effects were Early Buddhism and the Radical Reformation (i.e. the Radical Protestants).
Buddhism's developmental impact declined once it started being corrupted into the various forms it takes today (excluding Reformed or Christianised Buddhism in the West).
Islam, on the other hand, has had a mixed history. Whenever Islam has been open to non-Islamic views, it has been pro-development. However, Islam has at various times in different parts of the globe, turne in on itself and become what has been called "Islamist". That kind of Islam has always been anti-development.
In fact, development has taken the fangs from most traditional relgiions. Judaism and Radical Protestantism (Evangelicalism) produced the modern world. But Radical Protestantism is what thrives best in it - if measured by the rate of growth of the religion concerned.
Of course, Evangelicalism also produces its own corruptions. Which is why I am not an evangelical but a simple follower of Jesus the Lord. Sphere: Related Content
Friday, July 10, 2009
Soros on the nature of markets
In an interview to the UK´s DIRECTOR magazine, Soros quarrels (as I do) with the academically-dominant hypothesis of "efficient markets" (that is, that prices are the efficient outcome of perfect knowledge in the market)
However, he puts the alternative much more succinctly and elegantly than I have ever done
He says that markets, so far from being self-correcting, are shaped by the ingorant biases of market players, and those biases can be self-fulfilling.
I take it that he means that those biases can be self-fulfilling at least in the short term. I would amplify that by adding, that such self-fulfilling biases can exist as long as the result is somewhere within shouting distance of reality. When the results of these biases get too far out of sync with reality, unfortunately reality always strikes back.
For the full interview, see http://tinyurl.com/m4m8ts Sphere: Related Content
However, he puts the alternative much more succinctly and elegantly than I have ever done
He says that markets, so far from being self-correcting, are shaped by the ingorant biases of market players, and those biases can be self-fulfilling.
I take it that he means that those biases can be self-fulfilling at least in the short term. I would amplify that by adding, that such self-fulfilling biases can exist as long as the result is somewhere within shouting distance of reality. When the results of these biases get too far out of sync with reality, unfortunately reality always strikes back.
For the full interview, see http://tinyurl.com/m4m8ts Sphere: Related Content
Moral choices
Following one of my posts, my friend Jay Rosen asks "Is it morally superior for a person to give their wealth to their family or to strangers? To refine the dilemma, If I could save one child, mine or an identical child who is not mine, which is morally the best choice?"
Actually, the two cases are quite different. In the first case, presumably we are speaking about what wealth remains after having completed the "normal" duties of taking care of and educating your child(ren).
In both cases, the primary duty is of taking care of those who are given to you by God to look after - and primary relationships come before secondary relationships. So necessary minimum care for yourself and your spouse comes first (on the grounds that we cannot and should not love others more than ourselves, but only as much as ourselves), care for parents precedes care for children, care for friends precedes care for non-friends (as is very clear from the direct teaching of Jesus the Lord himself regarding giving even to God having a lower priority than taking care of one`s partents).
However, minimum demands for each of these categories comes before higher demands from others, as Jesus also makes clear in the story of the Good Samaritan.
In the two cases above, the same principles apply. Which means, in the first case, that it is more moral to give the money to strangers, provided you have fulfilled your responsibilities to your elders and your children. In the second case, if you can only save one child, it should be that of your own - because the life of your own child comes before the life of another child. That is not only more moral, it is also more normal or instinctive.
I am sure that others may reach other conclusions regarding these two cases, but in each case we have to look beyond the decisions themselves to the principles on which the decisions are based and, in turn, beyond the principles to the authority who gives sanction to those principles. Sphere: Related Content
Actually, the two cases are quite different. In the first case, presumably we are speaking about what wealth remains after having completed the "normal" duties of taking care of and educating your child(ren).
In both cases, the primary duty is of taking care of those who are given to you by God to look after - and primary relationships come before secondary relationships. So necessary minimum care for yourself and your spouse comes first (on the grounds that we cannot and should not love others more than ourselves, but only as much as ourselves), care for parents precedes care for children, care for friends precedes care for non-friends (as is very clear from the direct teaching of Jesus the Lord himself regarding giving even to God having a lower priority than taking care of one`s partents).
However, minimum demands for each of these categories comes before higher demands from others, as Jesus also makes clear in the story of the Good Samaritan.
In the two cases above, the same principles apply. Which means, in the first case, that it is more moral to give the money to strangers, provided you have fulfilled your responsibilities to your elders and your children. In the second case, if you can only save one child, it should be that of your own - because the life of your own child comes before the life of another child. That is not only more moral, it is also more normal or instinctive.
I am sure that others may reach other conclusions regarding these two cases, but in each case we have to look beyond the decisions themselves to the principles on which the decisions are based and, in turn, beyond the principles to the authority who gives sanction to those principles. Sphere: Related Content
Wednesday, July 08, 2009
South Korean President follows the spirit of Jesus the Lord and of Gandhiji
A story on CNN has just announced that South Korea´s president is to to donate the bulk of his wealth (some $26 million)to set up a youth scholarship program
See http://edition.cnn.com/2009/WORLD/asiapcf/07/07/s.korea.lee.charity/index.html
Will politicians in Third World countries be inspired to follow this example?
I greatly doubt it.
But how about making such donation compulsory for all those who are elected to the top political offices? That would sort out those who genuinely want to serve their people from those who are merely power hungry.
Anyway, I want to salute President Lee Myung-Bak, and wish him many years of not merely serving his people, but leading them to greatness. Sphere: Related Content
See http://edition.cnn.com/2009/WORLD/asiapcf/07/07/s.korea.lee.charity/index.html
Will politicians in Third World countries be inspired to follow this example?
I greatly doubt it.
But how about making such donation compulsory for all those who are elected to the top political offices? That would sort out those who genuinely want to serve their people from those who are merely power hungry.
Anyway, I want to salute President Lee Myung-Bak, and wish him many years of not merely serving his people, but leading them to greatness. Sphere: Related Content
Tuesday, July 07, 2009
What caused the housing bubble?
Mark Thoma, the doyen of economics bloggers, asks this question in his latest blog.
His post is occasioned by Edward L. Glaeser´s discussion of the subject, at http://economix.blogs.nytimes.com/2009/07/07/in-housing-even-hindsight-isnt-20-20
Thoma, as always, generously quotes Glaeser, who discussed the possible roles of Alan Greenspan´s loose monetary policy, lower interest rates and increased availability of credit, concluding that the only explanation that makes sense is the "rise in optimistic beliefs about housing price appreciation ....even if those beliefs were held by only a small share of the population....Yet even if ridiculously rosy beliefs are a major part of bubbles, we cannot say that we understand those bubbles until we understand the sources of such beliefs"
Thoma takes on the task of traying to explain the sources of those beliefs, and comments. "I don't think people believed that housing prices would never, ever go down, what they thought is that housing prices would go up in real terms, on average, over time - that housing was a good long-run investment....(though) the belief that real housing prices rise over time is false, the evidence suggests that real housing prices are relatively flat over the long-run. Because people expected prices to rise on average when they should have expected them to remain flat, the correction... was far larger than anticipated and many homeowners weren't able to simply ride out the short-run variation like they thought they would be able to do. But this still leaves a question unanswered. Why did people have this false belief about the long-run trajectory of prices? Shiller explains that this happened because people believed that both land and building materials were becoming relatively more scarce over time, a belief he says is false, but that just pushes the "but why did they believe that" question back one step from housing prices to the prices of land and raw materials.,,,People are told (or were at that time) that stock markets are a great long-run investment. If you have the time to ride out the short-run fluctuations you can earn 8% per year. Just dump your money in an index fund that duplicates the market portfolio, and forget about it until many, many years later and you will do fine. Risk adjusted real returns on assets ought to equalize across markets through arbitrage, so shouldn't housing yield a real return similar to stocks (adjusting for risk)? Shouldn't there be a real return on housing just like in stock and other asset markets, and if so, doesn't that mean real prices will rise on average over time? This still requires beliefs about long-run prices at odds with (Shiller's) evidence though.
"One more note. I may be wrong to assert that people thought that housing prices would rise forever. If you know that there is a bubble in an asset market, but you believe you can sell fast enough once the market hits a turning point to still make a profit, or at least not lose much in any case, then you may be willing to make an investment that tries to exploit the short-term surge in prices. But while I think that may apply to stock markets, or other markets where assets can be sold quickly (the belief that is, the reality is quite different when everybody tries to sell at once), I'm not sure this applies to housing where sales can be notoriously slow. But it's still possible that people would know there is a bubble in housing prices, but still be willing to make an investment because they believe that housing prices would fall so slowly that, if necessary, they could sell their house before taking a loss. It just doesn't seem to me that this explanation works as well in housing as it does in stock markets".
No. And i doubt if most people were financially or economically literate enough to even understand that "Risk adjusted real returns on assets ought to equalize across markets".
But there is a simple explanation of the reason for the housing bubble that seems to me to have been overlooked by both Glaeser and Thoma. what if far more people felt they understood, and therefore felt able to play in, the housing market than in the stocks/funds market? In other words, what if far more people, who were less financially literate, were trading in houses than were trading stocks? Sphere: Related Content
His post is occasioned by Edward L. Glaeser´s discussion of the subject, at http://economix.blogs.nytimes.com/2009/07/07/in-housing-even-hindsight-isnt-20-20
Thoma, as always, generously quotes Glaeser, who discussed the possible roles of Alan Greenspan´s loose monetary policy, lower interest rates and increased availability of credit, concluding that the only explanation that makes sense is the "rise in optimistic beliefs about housing price appreciation ....even if those beliefs were held by only a small share of the population....Yet even if ridiculously rosy beliefs are a major part of bubbles, we cannot say that we understand those bubbles until we understand the sources of such beliefs"
Thoma takes on the task of traying to explain the sources of those beliefs, and comments. "I don't think people believed that housing prices would never, ever go down, what they thought is that housing prices would go up in real terms, on average, over time - that housing was a good long-run investment....(though) the belief that real housing prices rise over time is false, the evidence suggests that real housing prices are relatively flat over the long-run. Because people expected prices to rise on average when they should have expected them to remain flat, the correction... was far larger than anticipated and many homeowners weren't able to simply ride out the short-run variation like they thought they would be able to do. But this still leaves a question unanswered. Why did people have this false belief about the long-run trajectory of prices? Shiller explains that this happened because people believed that both land and building materials were becoming relatively more scarce over time, a belief he says is false, but that just pushes the "but why did they believe that" question back one step from housing prices to the prices of land and raw materials.,,,People are told (or were at that time) that stock markets are a great long-run investment. If you have the time to ride out the short-run fluctuations you can earn 8% per year. Just dump your money in an index fund that duplicates the market portfolio, and forget about it until many, many years later and you will do fine. Risk adjusted real returns on assets ought to equalize across markets through arbitrage, so shouldn't housing yield a real return similar to stocks (adjusting for risk)? Shouldn't there be a real return on housing just like in stock and other asset markets, and if so, doesn't that mean real prices will rise on average over time? This still requires beliefs about long-run prices at odds with (Shiller's) evidence though.
"One more note. I may be wrong to assert that people thought that housing prices would rise forever. If you know that there is a bubble in an asset market, but you believe you can sell fast enough once the market hits a turning point to still make a profit, or at least not lose much in any case, then you may be willing to make an investment that tries to exploit the short-term surge in prices. But while I think that may apply to stock markets, or other markets where assets can be sold quickly (the belief that is, the reality is quite different when everybody tries to sell at once), I'm not sure this applies to housing where sales can be notoriously slow. But it's still possible that people would know there is a bubble in housing prices, but still be willing to make an investment because they believe that housing prices would fall so slowly that, if necessary, they could sell their house before taking a loss. It just doesn't seem to me that this explanation works as well in housing as it does in stock markets".
No. And i doubt if most people were financially or economically literate enough to even understand that "Risk adjusted real returns on assets ought to equalize across markets".
But there is a simple explanation of the reason for the housing bubble that seems to me to have been overlooked by both Glaeser and Thoma. what if far more people felt they understood, and therefore felt able to play in, the housing market than in the stocks/funds market? In other words, what if far more people, who were less financially literate, were trading in houses than were trading stocks? Sphere: Related Content
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