What is a bubble?
Think quick. You have a housing bubble. After you recognize the problem should you respond by building more houses or fewer houses? The US responded by building fewer houses after 2006. The Chinese government is responding with policy initiatives to encourage more construction. Who is right? I say they both are. I would also argue that this shows that the term ‘bubble’ is vague, indeed almost vacuous. Does it mean:
1. Prices are rising fast.
2. Prices are obviously too high.
3. Prices are too high but the public doesn’t know it yet.
4. Prices are too high but neither the public nor the experts know it yet.
5. Prices are being pushed up by excessive demand. (US housing in 2006)
6. Prices are pushed up by insufficient supply. (Chinese housing today)
7. Prices are pushed up by a cartel (OPEC, 1970s)
And are there negative bubbles? If so, what are they called? And why don’t people talk about them?