<1) form a new bubble elsewhere>
I've thought about this a lot, particularly in view of the extraordinarily remote odds I gave the Fed of preventing the resolution of the Y2K bubble. Since they in fact did succeed in actually blowing a bigger bubble as the stock bubble was trying to correct itself, I've tried to understand why and how they were successful, and imagine a scenario under which they could deliver a similarly unlikely rescue of the housing bubble.
I see that we have witnessed a succession of "bubbles". The real bubble, as has been the case in all bubbles I've studied, is a debt bubble. When excess debt is created - excess defined as too quickly relative to the size of the economy involved - it impacts pricing. It may flow into bonds, it may flow into stocks, it may flow into finished goods, or it may flow into real estate. It creates bond bubbles, stock bubbles, commodity bubbles, and real estate bubbles. They can happen in succession or in tandem. What makes it so dangerous is when it flows into leveraged assets such that positive feedback begins to kick in. Rising asset prices permit additional debt creation, which feeds further asset price increases.
Of course, you already know all that too well. What I hope to add to the understanding here is this: you can only keep the debt bubble growing as long as there is another asset class of sufficient size to inflate. You can get a bubble to grow by lowering interest rates. By doing so, you can force rising bond prices and build a bond bubble. Similarly, you can foster a stock market bubble. Or, you can foster a real estate bubble. I think this last case has the distinction of being the ultimate bubble. No other asset class I can think of represents so large a stock of leverageable wealth as real estate. Think about it: how much of the country's collective assets are represented by real estate? And is there ANY other asset out there where you can put 5%, 3% or even ZERO collateral down for purchase?
Real estate is the ultimate bubble. No other asset class comes close in terms of overall size or leveragability. And add to that, no other asset class has anything approaching its ability to distort economic behavior. Real estate touches every corner of the economy - geographically, demographically - it is everywhere. It's no wonder the wealth effect of real estate is so huge; well over half the populous participates in the bubble, like it or not. Consequently, it is unmatched in its ability to produce massive distortions in consumption, investment, and job creation.
Since before 2000, I doubted that our bubble would unfold as previous bubbles had. Our Fed had "learned", but I wasn't sure just what they had learned or how it would change outcomes. What they learned is to rescue a failing stock bubble with a real estate bubble. Now, the big question is whether anyone knows how to rescue a real estate bubble.
There is no doubt in my mind; unless there is another asset class of greater size and importance, there is no way to rescue this bubble. When real estate implodes, there really is no way to save the debt bubble.
BC |
