Steven,
You win my "Emmy award" for best thinking in an SI post when you wrote:
The RE bubble was a fundamental (and as you point out, artificial) distortion that directed resources from active, productive, activity to passive collection (your comment in a later post about factories closing because it's more profitable to rent the space out is a classic example). While it helped a few, it imposed a huge burden on business. Anyone who shops in Asia knows that HK is no longer much of a bargain. Why? Primarily the huge cost of retail floor space, which is inevitably passed on to customers.
Bursting the bubble will cause a lot of pain to a few that can afford it (having raked in huge profits over the last few years), but I think it will ultimately improve the business climate and generate earnings across a wider spectrum.
It is too easy to forget, while prices are rising, that these asset bubbles have a bad side to them. They are artificial and a distortion of the market mechanism. Carried on long enough they cause gross inefficiencies and misallocation of scarce resources. So while many people focus on the negatives of the bursting bubbles, we should really be encouraged that this is a process that will ultimately result in better functioning economies.
I believe Mr. Greenspan has had this in mind in the U.S. as he has tried to deflate our asset bubble before it reached dangerous proportions. Stock market investors may curse him, but it is for their good that he has uttered phrases like "irrational exuberance".
Furthermore, I think that it has been a negative that many of these newly capitalistic countries went so long without a recession. A recession is like a wildfire that cleans out the deadwood at the forest floor. Left too long the eventual fire is more damaging than it would have been with smaller periodic fires. Let's hope that the present inferno doesn't convince governments and people that the fire of capitalism is not worth the price and leads them to return to the "managed forest" policies of a command economy. If the fire does its job, the new growth of spring should be spectacular. (My tribute to Schumpeter)
-Robert
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