What goes up . . . usually stays up

Back in May 2003 The Economist said that many countries were in the midst of a housing bubble: 

A SURVEY in The Economist in May predicted that house prices would fall by 10% in America over the next four years, and by 20-30% in Australia, Britain, Ireland, the Netherlands and Spain. Prices have since continued to rise, so have we changed our mind?…

I’ve already discussed the US; in this post I’d like to examine some foreign markets.  Nick Rowe has an excellent post on bubbles, and he argues that Canada did not experience a housing bubble.  Before considering Nick’s assertion, take a look at this graph of average Canadian housing prices (you must click on the graph link on the right.)

Nick argued that if there had been a bubble then you’d expect that once prices stopped rising and began falling, then people would worry that the bubble had burst and prices would fall sharply.  Prices did fall a bit when the worldwide recession hit Canada in late 2008, but then began recovering in the second half of 2009.  So he concluded there was no bubble.  My hunch is that he is right, although as they like to say on Wall Street “past performance is no guarantee of future success.”

[Note; while working on the post I noticed that Nick’s co-blogger Stephen Gordon has a very informative post on the Canadian housing market.]

My theory all along has been that the US housing bubble was widely misunderstood, and that if NGDP had kept growing at a 5% rate after mid-2008 then the US housing bust would have been far milder.  More specifically, in heartland markets like Texas there would have been no housing bust at all.  Most of the damage would have occurred in 4 key sub-prime states, and even in those states the price declines would have been far smaller.

One implication of my hypothesis is that in most other countries the housing crash should have occurred later than in the US, and should have been far milder.  The Economist, which ironically is the publication that I most strongly disagree with on this issue, has published a graph that strongly supports my hypothesis.  If you click on the link you will see an interactive graph that shows global housing trends since 1990.  I found it easier to read by moving the starting point to 2000:1, and go up to 2009:3, the last observation.  And I used real housing prices, which should make it easier to spot bubbles in countries that have inflation. 

Many countries experienced no unusual increases (Germany, Switzerland, Japan, Hong Kong, China, Netherlands, etc.)  Other countries like France experienced a sharp increase, but only a very small decline.  Australia and (to a lesser extent) Canada also fit this pattern.  Furthermore the timing of the decline is clearly associated with the 2008-09 recession, which reduced NGDP in the US, Europe and Japan.  Also note that where housing downturns eventually did occur, they were generally more severe in countries that had severe recessions (UK and Ireland) and relatively mild in countries where the recession was much milder (Australia and Canada.)  So it looks like we can say there was (at best) a housing bubble in the US, and to a lesser extent a few other countries like Spain and Ireland.  But no global housing bubble.

I believe that portions of the US market, and perhaps to a lesser extent the Irish and Spanish market, became overvalued in early 2006.  The other English-speaking countries also saw large increases in real housing prices, just as in the US.  But because they experienced much milder declines, and because those declines were closely associated with the severe global recession, I don’t see how you can call them bubbles.  A severe recession is a fundamental factor that would be expected to reduce housing prices even if the EMH explained 100% of house price changes. 

While my falling NGDP story explains most foreign downturns, The Economist’s bubble story seems inconsistent with these inconvenient facts:

1.  Prices in most other “bubble” markets did not decline when the US market turned down in 2006.

2.  The declines in other markets were generally much milder, even when the preceding price increases had been just as rapid as in the US.

3.  Housing prices turned up recently in places like Australia and Canada, despite their being “overvalued” according to The Economist.

So you shouldn’t believe people who tell you that we are in a bubble, and who defend that hypothesis by merely pointing to fast rising prices.  Ex post, people like Krugman and Shiller were right, but only about the US.  In many other countries large price increases did not lead to a major collapse, and prices are still quite high in early 2010.  

Of course if you wait long enough prices will eventually fall in any country, that’s how markets work.  But it turns out that it is much harder than most people imagine to predict which prices are “obviously overvalued,” and hence bound to fall sharply.  We all know about confirmation bias.  Because most elite economists live in the US, and pay little attention to countries like Australia, they tend to assume that recent events have provided decisive support to their bubble hypotheses.  Yet from a global perspective bubble theories haven’t done well at all.  Indeed they performed quite poorly over the past 10 years.  Outside of the US and Ireland, you would have been better off if you had ignored The Economist’s bubble warning of 2003, and instead had gone out and bought a house.  But what about those who base their forecasts on fundamentals, and not merely the rate of price appreciation? 

If you look at the specific countries cited in The Economist’s famous prediction, the results are far worse than even for the US.  Recall that in May 2003 The Economist predicted 20% to 30% prices declines in 5 foreign countries.  If you set the starting point at 2003:2 and use nominal prices, then you will see that prices rose by more than 10% in the Netherlands, and by anywhere from 30% to 55% in other 4 countries.  Not exactly the 20% to 30% price drops they expected.  Some of my commenters claimed that The Economist was right in the long run, because prices did eventually fall.  I don’t think that argument is right—surely you must be held to the terms of your prediction, otherwise there is no way to ascertain how good you are at forecasting.  But even with those very generous assumptions, they were still far off base.  Even today the Netherlands continues to show a greater than 10% gain.  Spanish, British and Australian housing prices are still up by 30% to 50% over 2003 levels.  Only Ireland is even remotely close, with its price appreciation having fallen to about 10%.  But even that prediction is far from the 20% to 30% price drop forecast by The Economist.  The most generous assumption of all would be to use real housing prices.  But even in that case none of the 5 showed price declines over the following 4 years, and only Ireland experienced a tiny decline between 2003 and late 2009.

So The Economist’s predictions of 10% to 30% price declines over 4 years were spectacularly off base.  Even over a 6 1/2 year time frame, only the US (the country they thought was the least overvalued) experienced a significant decline in house prices.  And then only in real terms.  So in all 6 countries their predictions were wildly inaccurate for the 4 year time window they specified.  And even under the most generous assumptions, using real housing prices and a 6 1/2 year time frame, The Economist’s predictions were still highly inaccurate in 5 of 6 countries.  What an awful record of forecasting housing prices through the use of ”fundamentals.”  This shows just how difficult it is to identify bubbles in real time.


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29 Responses to “What goes up . . . usually stays up”

  1. Gravatar of Marcus Nunes Marcus Nunes
    22. January 2010 at 08:57

    Since 1998, the Economist has been peddling “bubbles”. It has been fantastically successful, so much so that if it was a “product”, The Economist would have become very rich indeed.
    A good read is Peter Garber´s 2000 book “Famous first bubbles”. It should be required reading for The Economist. Governments would also learn that they usually are a major source of financial crises.

  2. Gravatar of rob rob
    22. January 2010 at 09:02

    Since you are doing such a good job demolishing bubble stories, would you care to take on Dutch tulips?

  3. Gravatar of Marcus Nunes Marcus Nunes
    22. January 2010 at 09:16

    rob
    Dutch tulips are covered in detail in Garbre´s book

  4. Gravatar of rob rob
    22. January 2010 at 09:24

    Marcus, thanks. i also see now that wikipedia does a good dust up of it. Geez, so there is no such thing as bubbles. everything i learned is now standing on its head.

  5. Gravatar of Greg Ransom Greg Ransom
    22. January 2010 at 10:23

    Scott, this is all very fun, taking on journalists putting out journalism.

    You still haven’t taken on BIS chief economist William White and his BIS research team.

    Sure it’s fun playing in the kindergarten with journalists like a cat with a mouse.

    William White isn’t a mouse and his research reports weren’t weekly journalism.

    I’d also like to see you take on Steve Hanke, who points out significant nominal aggregate spending “bubbles” in the U.S. during the Greenspan / Bernanke period.

  6. Gravatar of Greg Ransom Greg Ransom
    22. January 2010 at 12:20

    Here’s Hanke:

    “The Fed is a serial bubble blower. Let’s first consider the Fed-generated demand bubbles. The easiest way to do this is to measure the trend rate of growth in nominal final sales to U.S. purchasers and then examine the deviations from that trend. Nominal final sales grew at a 5.4% annual rate from the first quarter of 1987 through the third quarter of 2009.This reflects a combination of real sales growth of 3% and inflation of 2.4%.

    The nominal final sales measure of aggregate demand contains three significant deviations from the trend (demand bubbles). The first followed the October 1987 stock market crash. The second followed the Asian financial crisis and the collapse of the Russian ruble and Long-Term Capital Management in 1998. The last jump in nominal final sales was set off by the Fed’s liquidity injection to fend off a false deflation scare in 2002.

    The Fed’s zigzag pattern is clear: an overreaction to a so-called crisis, resulting in the excessive injection of liquidity (a sales boom), followed by a draining of liquidity and a recession (a sales slump). The most recent aggregate demand bubble wasn’t the only one that the Fed was pumping up. The Fed’s favourite inflation target – consumer prices, less those for food and energy – was increasing at a regular, modest rate. Over the 2003-2009 period, this metric increased by 14.3%.

    The Fed’s inflation target metric signaled “no problems.” But abrupt shifts in major relative prices were underfoot. Housing prices were surging, increasing by 44.7% from the first quarter in 2003 until their peak in the first quarter of 2006. Share prices were also on a tear.

    The most dramatic price increases were in the commodities. Measured by the Commodity Research Bureau’s spot index, commodity prices increased by 92.2% from the first quarter of 2003 until their peak in the second quarter of 2008.”

    Here’s the link:

    http://network.nationalpost.com/np/blogs/fpcomment/archive/2010/01/21/rewriting-the-fed-s-history.aspx

  7. Gravatar of William William
    22. January 2010 at 13:27

    Any chance of a response to Rajiv Sethi? (http://rajivsethi.blogspot.com/2010/01/on-efficient-markets-and-cognitive.html)

  8. Gravatar of OGT OGT
    22. January 2010 at 13:40

    I am in some agreement with Greg Ransom, this bubble vs EMH is quite beside any relevant point. Though I’d point to different research.

    The financial crisis we are going through is not actually that unique if one takes a more historical view, and this is quite helpful in getting beyond anecdotal back and forth over the minutes of a Hank Paulson weekend meeting. As Alan Taylor and Moritz Schularick have demonstrated based on the Rogoff and Reinhart data set, credit growth is the single best predictor of a financial crisis. They are far more important than real interest rates, broad money, or any single asset price.

    Our ancestors lived in an Age of Money, where aggregate credit was closely tied to aggregate money, and formal analysis could use the latter as a reliable proxy for the former. Today, we live in a different world, an Age of Credit, where financial innovation and regulatory ease has permitted the credit system to increasingly delink from monetary aggregates, setting in train an unprecedented expansion in the role of credit in the macroeconomy. Without an adequate historical perspective, these profound changes are difficult to appreciate, and one task of this paper has been to document the nature of this evolution and its ramifications over the last 140 years for a group of major developed economies.

    We have shown how the stable relationship between money and credit broke down after the Great Depression and World War 2, as a new secular trend took hold that carried on until today’s crisis. We conjecture that these changes conditioned, and were conditioned by, the broader environment of macroeconomic and financial policies: after the 1930s the ascent of fiat money plus Lenders of Last Resort—and a slow shift back toward financial laisser faire—encouraged the expansion of credit to occur.

    http://www.econ.ucdavis.edu/faculty/amtaylor/papers/w15512.pdf

  9. Gravatar of Lorenzo from Oz Lorenzo from Oz
    22. January 2010 at 14:09

    As I have noted before, bubbles are only clear in retrospect. If they were clear in advance, people would know prices were going to collapse and would not invest in ways which lead to the price rises in the first place.

    But the story on macro-analysis of bubbles is even worse than Scott implies, since it depends greatly on which housing markets one is looking at in the US. I know I am a bit of a stuck record on this, but it is irritating to see analysis which treats the US as if it was a single housing market when clearly different markets had very different patterns. Something Krugman (amongst others) pointed out years ago with his “Zoned Zone” versus “Flatland” comparison.

    Australia is all “Zoned Zone”. Germany is all “Flatland”. The difference is in the micro-economics, in the regulation of land use. Other factors play off that.

    Australia, btw, was something of a “bubble economy” on the Japan model in the late 1960s and early 1970s. The collapse of the mining boom bubble in 1973 helped create a “flat” economy for the next decade which led to the economic reforms from 1983 onwards. So, in a sense, Australia has already been where Japan is after the collapse of its “bubble economy” and the US is now.

  10. Gravatar of Good housing market advice – Economics - Good housing market advice - Economics -
    22. January 2010 at 14:43

    [...] identify bubbles and that following The Economist's advice would be a bad idea. Today he elaborates on the point, using an interactive home price chart we put up not long ago.So The Economist’s [...]

  11. Gravatar of rob rob
    22. January 2010 at 15:07

    I’m still married to the idea that bubbles must exist in order for the EMH to work. (to turn the argument on its head) For the market to remain unpredictable it must continue to surprise in both direction and volatility. Most of the time a market makes micro-adjustments based on new information. Other times it goes non-linear on your ass.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    22. January 2010 at 17:49

    Yes, Scott, I believe that the US real estate “bubble” would have stayed more or less inflated had the US maintained 5% NGDP growth. How come all people with seemingly functioning neuron synapses don’t feel the same?

  13. Gravatar of Stevend Stevend
    22. January 2010 at 19:09

    So beginning in 2003 there was a sharp increase in “volatility” in real estate markets. Some bubbles didn’t burst, this is the downside of large unpredictable volatility wave (for the US).

    Why would you assume a sharp decrease in volatility– a “plateau”– isn’t that making an even less likely prediction from an EMH perspective? (high volatility markets tend to stay high volatility, not stop cold at a plateau)
    More likely would be double digit negative repricing at some point in the future (a recession the most likely time).

  14. Gravatar of Greg Ransom Greg Ransom
    22. January 2010 at 19:43

    “credit growth is the single best predictor of a financial crisis”

    As early as 1929 Hayek put credit expansion right at the heart of boom and bust theory — see his _Monetary Theory and the Trade Cycle_.

  15. Gravatar of anon/portly anon/portly
    23. January 2010 at 00:40

    William above links to Rajiv Sethi, who begins:

    “It takes a certain amount of audacity to appeal to cognitive illusions in defense of a hypothesis that denies any role for human psychology in the determination of asset prices.”

    I wish someone would explain the logic of this to me – what is wrong with saying that cognitive illusions can not do x (say, affect asset prices) but can do y (say, affect a person’s view of a theory of asset prices)?

    Then he tells us about the Quantum Fund, where (if I follow the story correctly) they sold short when the market was rising and then changed tactics and bought in right before the market started dropping.

    This is supposed to illustrate that it’s hard to make money on a bubble even if you can correctly spot one, but it seems to me that it better illustrates the idea that people are a lot more sure they’ve spotted a bubble after the bubble bursts than before the bubble bursts. (Which I think is one of Scott Sumner’s – and Fama’s – points).

  16. Gravatar of anon/portly anon/portly
    23. January 2010 at 01:03

    From The Economist:

    “And now we find ourselves in a situation where these people, having set up a model explaining what would happen which was subsequently verified by events, are being told that they suffer from cognitive illusion. That in fact, this testable hypothesis, which passed a test against real world events, is no good.

    Well, ok. If Mr Sumner and Mr Fama continue to feel secure in their beliefs, then that’s their business.”

    When you can see for yourself, by using The Economist’s house price thingy, how far off The Economist’s housing price predictions have been, despite The Economist patting itself on the back for those predictions, that’s pretty funny.

    But The Economist providing a solid example of the very cognitive illusion Sumner posits while huffily reproving Sumner for positing it, that’s really funny.

    I’m surprised at comments which sort of seem to deny the basic humor here. I think Scott Sumner is being very generous to them, really.

  17. Gravatar of anon/portly anon/portly
    23. January 2010 at 01:37

    I really like the Worthwhile Canadian posts. A point Nick Rowe makes that I’d sure like to understand better is this:

    “The puzzle there is why anyone would lend them the money, not why they borrowed it to pay very high prices. If there was a bubble, it was a lenders’ bubble, not a house buyers’ bubble.”

    I still don’t understand why financial firms made the bad decisions they made. Even if bubbles are impossible to predict, does that mean that you can’t make any assessment about risk?

    I still like this one from Tyler Cowen:

    http://www.marginalrevolution.com/marginalrevolution/2008/10/what-caused-the.html

  18. Gravatar of ssumner ssumner
    23. January 2010 at 07:26

    marcus and rob. I read Garber’s book a long time ago. He seemed to think the tulipmania was not as irrational as generally perceived, although I believe it got a little out of hand at the very end.

    Greg, I responded on White on another thread just a minute ago. I think White was wrong in 2003, and the low interest rates were appropriate. Why would I want to take on Hanke? I agree that NGDP bubbles are undesirable, and that the Fed should keep NGDP growing at a slow but steady rate.

    Greg#2, I mostly agree with Hanke, except he puts the Fed mistake in the last cycle a bit too early. I believe he is using growth rate targeting as his criteria, whereas I use level targeting (as does Woolsey.) So in 2002 and 2003 NGDP was a bit below the trend line, and a bit of catch up was appropriate. It was in the 2004-06 period where policy was a bit too expansionary. But it was a small error, and did not cause the subprime fiasco.

    Greg, real commodity prices rose dramtically, but long run trends in real commodity prices are determined in world markets, and are not a concern of monetary policymakers.

    William, Thanks, if I can find the time.

    OGT, I have no idea what they mean by “financial laissez faire.” Are they referring to Fannie and Freddie, FHA, the CRA, FDIC, Basel I, Basel II, Sarbannes-Oxley, etc etc. How about the 100 government forms you must sign each time you get a mortgage? Or is it the tax deductiblity of mortgage interest?

    If we had laissez faire this crisis would have been much smaller. Would you put money in a bank making tons of subprime loans without FDIC? Me neither.

    Lorenzo, Those are very good points, and I should have added zoning to my previous answer. The fact that Australian housing didn’t collase along with the US is thus even harder for the bubbleheads to explain. Australia is exactly the sort of market where housing should have collapsed. The fact that it didn’t suggests that fundamentals like the busienss cycle are the key factors, not irrational exuberance.

    rob, I agree, but I don’t call those ‘bubbles.’

    Mark, Yes, and just to be clear, I am not saying prices wouldn’t have fallen, just that they would have fallen much less.

    Stevend, There is no problem here at all. Unusual increases in volatility tend to gradually revert to the mean over time. The recent non-collapses were not characterized by a complete lack of volatility, look at the Canadian graph. What happens perfectly matches volatility theory.

    anon, Thanks. BTW, I have never argued that the EMH is true because people are “rational” in the sense that psychologists use the term. I agree that people tend to be overconfident, etc. But smart traders know about human weaknesses, and those deviations from the EMH are mostly arbitraged away.

    anon, Thanks, I’m glad someone else sees the humor, I thought I was starting to go crazy. If there is anything that proves how powerful these cognitive illusions really are, it is the fact that people think they were right, when they were actually 180 degrees off in their predictions—predicting massive house price collapses in countries where house prices actually rose sharply.

    Anon, Yes, I have also been arguing that the mistakes were most directly attributable to the lenders, and that for borrowers it may have been worth the risk (although there it varies case by case.

    The Tyler Cowen post is very good, I entirely agree.

  19. Gravatar of OGT OGT
    23. January 2010 at 08:00

    Prof Sumner- I dount they mean those things, their data covers twelve different countries with much the same result. The key governmental moral hazard play is the Fed and its lender of last resort activities.

    The financial industry has repeatedly come up with new vehicles to expand liquidity from CD’s in the sixties to Real Estate investment trusts in the seventies to hedge funds and CDO’s more recently. Each time the Fed has stepped in with Lender of Last resort funding to avert a meltdown but not following that expanded insurance with expanded oversight.

  20. Gravatar of Greg Ransom Greg Ransom
    23. January 2010 at 09:18

    Scott, don’t you view Hanke’s effort as different from your own to the extent that Hanke is disaggregating various price and output/consumption relations — and attributing a causal role to shifts in these price / goods relations. Your own view seems to be that structural shifts in intertemporal price and production relations have little or no causal role to play in the boom / bust pattern — and any systematic shift in this structure of relations across time is both sustainable and “rational”.

    Or is you own view closer to Hanke’s than appearances suggest?

    Scott writes,

    “I mostly agree with Hanke, except he puts the Fed mistake in the last cycle a bit too early. I believe he is using growth rate targeting as his criteria, whereas I use level targeting (as does Woolsey.) So in 2002 and 2003 NGDP was a bit below the trend line, and a bit of catch up was appropriate. It was in the 2004-06 period where policy was a bit too expansionary. But it was a small error, and did not cause the subprime fiasco.”

  21. Gravatar of Greg Ransom Greg Ransom
    23. January 2010 at 09:22

    Here’s Hanke’s conclusion: “[it's] the divergent movements of different market prices during the business cycle that counts”.

    Hanke:

    “The Fed should dust off the works of economists from the Austrian school, particularly Prof. Friedrich Hayek. The main lesson from the Austrians was their extreme skepticism about the exclusive reliance on one magic index — the price level — to guide central bank policy.

    Indeed, Hayek stressed that changes in general price indexes don’t contain much useful information. He demonstrated that it was the divergent movements of different market prices during the business cycle that counted.”

  22. Gravatar of OGT OGT
    23. January 2010 at 09:38

    Sumner-On your last point about the FDIC, demand deposits make up an increasing small share of bank funding, especially for the big banks. Why do bond buyers make loans to these sub-prime lenders, or buy tranches in MBS’s made up of them? That’s a pretty complicated question, the implicit Lender of Last Resort guaranty? Too much faith in EMH?

    My local bank has FDIC and didn’t make sub-prime loans, in fact, smaller banks that are more dependent on insured deposits made a smaller percentage of sub-prime loans. To believe that finance is more restricted now than in the fifties or that FDIC the prime moral hazard player is nothing more than a cognitive illusion.

  23. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. January 2010 at 14:16

    BTW, I have decided to put the thoughts I have scattered in comments on this blog about bubbles in a single post.

  24. Gravatar of Greg Ransom Greg Ransom
    23. January 2010 at 14:42

    What about commodities bought and sold for dollars — e.g. oil. What is the argument that this has no concern for policy makers? I think I’m missing something.

    We’re not leaning on old fashioned Keynesian closed economy assumptions here, right?

    Scott writes,

    “Greg, real commodity prices rose dramtically, but long run trends in real commodity prices are determined in world markets, and are not a concern of monetary policymakers.”

  25. Gravatar of Doc Merlin Doc Merlin
    24. January 2010 at 01:28

    @Greg Ransom:
    I completely agree that reliance on a single inflation rate is bad. Time changes in variance in the set of prices of the goods used to measure the various price indices is also very telling.

    @Scott’s reply to greg:
    Quick increases in PPI are dangerous for the same reason that oil shocks are.

    @Scott wrt irrationality of bubbles:
    Current econophysics bubble-theory can be derived using EMH conditions which seems counterintuitive, but says that bubbles aren’t /really/ irrational.

  26. Gravatar of Bill Stepp Bill Stepp
    24. January 2010 at 06:53

    The Economist has blamed everything under the sun for the boom and bust. It had a big article on the subject a year or so ago, and trotted out everything anyone has pointed to as a cause, and said “yup, yup, yup….”
    A few years ago, it mentioned Hayek’s contributions, but since the appointment of the politically correct Mickelthwait in 2006, Austrians haven’t been mentioned much.
    Gun control, on the other hand…. And Comrade O is the cat’s meow. (“It’s time,” was the front-page headline the week before Comrade O’s election/selection. Don’t think they’d evever support the real free marketeer.)
    A sad decline of a once great “newspaper.”

  27. Gravatar of scott sumner scott sumner
    24. January 2010 at 08:39

    OGT, I agree, but the root cause of these crises is not enough collateral (assuming we are stuck with FDIC and TBTF), and it’s clear the government is afraid to do anything to fix that problem.

    Greg, There are two issues. Do NGDP shocks cause cycles? And second is the transmission mechanism from NGDP to RGDP involve all sorts of specific asset prices and quantities.

    I think the answer to both questions is yes.

    Greg#2, I agree. I like to distinguish between sticky wages and some prices, and on the other hand more flexible prices of stocks, commodities and real estate. (Of course stocks represent the value of corporate capital.)

    OGT#2, Those are good points. I have always emphasized these factors:

    1. FDIC (lots of small banks are failing)
    2. TBTF
    3. Stupid investors.

    I am quite willing to entertain the possibility that stupid investors might have been the single largest factor. The three factors are so intertwined we’ll never know for sure.

    I thought one of the most powerful pieces of evidence came from a commenter a month or two back, who described a meeting of top banks and the UK government in 2006 (before the crisis.) The government asked why they weren’t doing stress tests for a worst case scenario, and the banks sheepishly admitted that they assumed the UK government wouldn’t allow that to happen. That’s moral hazard.

    The government indignantly replied that they would do no such bailouts. And then in 2008 they did them.

    Lorenzo, I like that post, thanks for linking to my blog.

    Greg, I think there are three factors affecting commodity prices. Inflation, secular trends in the world economy (China growth), and the business cycle. Obviously the Fed can impact prices through inflation (or dollar depreciation). And the Fed has some impact on the world business cycle—but not much if they are doing they job properly. So I don’t think there was much the Fed should have done about $147 oil in mid-2008. The US economy wasn’t overheated in mid-2008; NGDP growth was very modest. Unfortunately they disagreed, and adopted a policy that did bring down oil prices sharply in late 2008.

    Doc Marlin, There will always be new bubble theories, they are easy to create. I could easily come up with such theories that work well for past data, if I had the interest.

    Bill, You could argue that they are more influential by being non-partisan. People on the left can’t simply dismiss their views. The Republicans really didn’t deserve to be re-elected in 2008, they had reached rock bottom. (That’s not to say Obama was a good choice, but unfortunately we have a two party system.)

    Also recall that they are a UK paper, and politics in the UK is far to the left of America on many issues.

  28. Gravatar of TheMoneyIllusion » Who are the famous bubble deniers? TheMoneyIllusion » Who are the famous bubble deniers?
    8. December 2010 at 17:28

    [...] The Economist magazine touting its successful housing bubble predictions of 2003 in an ad, despite the predictions being incorrect for most of the countries listed.  That’s how strongly we want to believe in bubble [...]

  29. Gravatar of TheMoneyIllusion » Sloppy reasoning at the Financial Times TheMoneyIllusion » Sloppy reasoning at the Financial Times
    1. August 2012 at 05:26

    [...] Their other trick is to make predictions all over the map, hoping that at least one prediction comes true.  Back in 2003 The Economist made a whole bunch of bubble predictions for developed country housing markets.  The vast majority proved wrong, indeed far off base.  Later they did an advertisement for their magazine bragging that these predictions were right.  Most readers are too lazy to check, and having heard a lot about bursting bubbles in the US, Ireland and Spain, just assumed the ad was correct.  But I am not too lazy to check, and I have a long memory. [...]

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