Bubble, Bubble Toil and Trouble

I put up this comment, in reply to an R-blogger blogger musing on bubbles. Liked it well enough to share with you all.


So far as the real estate bubble: some of us saw it happening in 2003, although the (self interested) mainstream pundits didn’t or wouldn’t. The measure is simple: the historic ratio of

median house / median income

is a (near) constant over short to medium term in any one place. Aggregated over the USofA, it’s a bit flaky, given regional differences in price/wage levels.

Here’s a plot: http://drcoddwasright.blogspot.com/2011/08/viagra-at-home.html

The point of bubbles is quite simple, they occur when mo money chases less stuff. Credit isn’t really needed, although that certainly happened with the Subprime Mess. A bubble can happen with just a shift of funds out of proportion to some sector. The first dot com bubble was just that; a massive shift of existing funds to a narrow sector.

The Subprime Mess was motivated, in the patient zero sense, by Greenspan’s decree that interest rates would be held down. The bread crumbs can be traced. The point is that it was not the result of independent homo economicus decisions, but deliberate political decisions by a few political appointees. Pre-20th century, not so much.

The financial services coup de etat of our economy is a bubble, from the point of view of historic proportion of national income. This was a co-ordinated shift from the many to the few orchestrated by Right Wingnuts in Congress. Nothing to do with excess credit. One could go on for days.

Specific (or narrow sector) stock bubbles are generally driven by ignorant retail fools. We saw that with vaccine stocks two years ago. Nothing to do with excess credit. Netflix is quite the same.

In other words: Minsky’s only half (b)right. Inflation requires mo money, but narrow (in time or space) inflation need not require global increases in cash/credit. If you look at median income from 1980 to 2008, you’ll see that it moved virtually not at all. The Subprime Mess was motivated as much by existing funds shifting to “higher yield, lower risk” housing instruments due to Greenspan’s enforced low interest rates. Up to then, yes, housing instruments were low risk, *just because* they were restricted to conservative price/income ratio. Blow out that ratio, and you blow out the risk. Some noticed, but the mainstream pundits turned a blind eye. It was in their self interest to do so.

Analytics don’t help much when the propellent is vicious politicians in league with Banksters.