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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: gregor_us who wrote (7621)2/11/2004 1:14:26 AM
From: glenn_a   of 110194
 
lambeth-palace.

Re: the comment "wealth stored in fixed assets like houses is not available to "enter back into the economy" causing inflation".

I believe the sentiment expressed here is that ultimately prices are set where the marginal buyer meets the marginal seller. In an asset mania, the marginal buyer is willing to pay extreme prices from a perspective of underlying value. In an asset implosion, the margin seller is willing to sell his assets for a song ... so desparate is he/she to raise liquidity, or so fearful is he/she of the price of the asset falling yet farther.

If an asset bubble in housing prices has been financed with debt, and home mortgage loans taken out against the collateral of inflated home equity prices ... then should the market turn illiquid, and there develop a rush to liquidity, the apparent "wealth" inherent in an asset can literally evaporate overnight, as the price at which the marginal buyer meets the marginal seller plummets. Of course, it plummets because there is a surplus of home owners needing to raise liquidity, and there is a surfeit of home buyers having the liquid capital they are willing to part with to purchase a new home.

Thus the importance to (i) attending to potential liquidity/illiquidity issues in an asset mania, and (ii) understanding the "sociology of ownership" of the assets underlying an asset bubble.

Make sense? Or no?

Regards,
Glenn
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