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May 27, 2005
Krugman Running Out of Bubbles?--updated!
I know that people who write the articles don't write the headlines. But you gotta appreciate the one on the latest Krugman column: Running Out of Bubbles.
Of course, Krugman himself is running out of bubbles. A year or two back he warned direly of a "double-dip recession". That didn't happen, so now he's onto the housing bubble, which could in turn lead to recession:
But although the housing boom has lasted longer than anyone could have imagined, the economy would still be in big trouble if it came to an end. That is, if the hectic pace of home construction were to cool, and consumers were to stop borrowing against their houses, the economy would slow down sharply. If housing prices actually started falling, we'd be looking at a very nasty scene, in which both construction and consumer spending would plunge, pushing the economy right back into recession.
There's always a happy ending sometime in the future for Krugman. Here's my take: There will be no bubble. Housing prices will stop galloping forward eventually, but there's no reason to expect them to drop at this stage of the economy. The economy leads the housing market, it doesn't trail it, despite this ridiculous comment:
So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?
That's patent nonsense. The housing market can be important to the overall economy, but it's hardly the driver of demand. I don't know how energetically people are pulling equity out of their houses; I certainly haven't drawn down any of the appreciation in value of my home; I've been happy to find my loan to value ratio declining into the 30% range.
California has gone through several housing market booms. In the early 1990s things turned sour there (remember the Michael Douglas flick where he's a laid-off defense worker who goes postal?), but by the mid-1990s they were back in business. In the late 1990s you had the dot com boom in the SF Bay Area; that was clearly unsustainable, but guess what? It's back again.
Update: A Stitch in Haste has some excellent thoughts on this.
Posted by pat at May 27, 2005 09:34 AM