Tuesday, March 10, 2009

What caused the housing bubble?

Nobel laureate Paul Krugman mostly agrees with Ben Bernanke: It was caused by a global savings glut.

Paul Krugman, March 1, 2009:
How did this global debt crisis happen? Why is it so widespread? The answer, I’d suggest, can be found in a speech Ben Bernanke, the Federal Reserve chairman, gave four years ago. ...

In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world.

The result was a world awash in cheap money, looking for somewhere to go.

Most of that money went to the United States — hence our giant trade deficit, because a trade deficit is the flip side of capital inflows. But as Mr. Bernanke correctly pointed out, money surged into other nations as well. ...

For a while, the inrush of capital created the illusion of wealth in these countries, just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine. But bubbles always burst sooner or later, and yesterday’s miracle economies have become today’s basket cases, nations whose assets have evaporated but whose debts remain all too real. ...

If you want to know where the global crisis came from, then, think of it this way: we’re looking at the revenge of the glut.
Ben Bernanke, March 10, 2005:
During the past few years, the key asset-price effects of the global saving glut appear to have occurred in the market for residential investment, as low mortgage rates have supported record levels of home construction and strong gains in housing prices.


  1. homer jay simpsonMarch 10, 2009 10:02 AM

    and do you agree with him?

  2. Lacking a better explanation, I'd have to say yes.

  3. Hello David & James "bubble meter" authors,

    As a money fanatic & blogger I have been following your blog for a little while now...I have read some very interesting and great posts! So I have a little offer for you....

    The company I work for would like to pay you to put a text link to a credit card site on your blog. I have not seen any other deals already, but would love to make you an offer anyway. I'm sure we can come up with some good terms?!

    The website is called creditcardmenu.com and we will be launching a new fantastic looking credit card review and comparison service which is free to our customers; let me know your thoughts.

    So let the bartering begin??!

    Oh and keep up the great work!

    Alex Preece
    Bad with my money, great with other peoples!
    (I am based in London, England so excuse the weird times you get this
    email!) Giant Investments
    E: alex.preece@giant.org.uk
    T: 01273 224002

  4. supernintendo chalmersMarch 10, 2009 12:23 PM

    here's some refutation. first from Minyan Succo, then Mish piles on...





    in a nutshell, "...much of that proposed "savings" is in reality Chinese printing presses running like mad, selling Yuan (Renmimbi) to buy dollars."

  5. This is pretty funny, this guy writing you wanting to put a credit card link on your website. Of course he will make a LOT of money from this link, and in subsequently selling his company (see: Blue Lithium) but I feel it would compromise the integrity of your site.

    Hoping you don't take him up on his offer...

    As for the Bernanke scenario, LOVE to find these old quotes from guys, this was very interesting.

  6. In working tandem with the savings glut was greenspan's idiotic insistence to keep treasury interest rates artificially low. This drove the glut of savings in search of someplace to go with a better return. One huge place that money found was Mortgage Backed Securities. This market exploded because investors loved the returns, ratings agencies said the debt was safe and everyone was making tons of money on fees. So all of a sudden brokers would give anyone with a pulse a mortgage, then pass it up the chain to be packaged and sold.

  7. There is no bubble, DC is the next Manhattan.(where there is also presumably no bubble...) - Lance

  8. Anonymous said...
    "In working tandem with the savings glut was greenspan's idiotic insistence to keep treasury interest rates artificially low."

    I think a global savings glut started creating the bubble around 1998 (mild bubble levels reached around 2001), but an unreasonably low Fed funds rate in the early part of this decade effectively poured gas on the fire.

    By the way, Greenspan has a new article in The Wall Street Journal regarding this very subject.

  9. I still remember Greenspan's use of the word "froth."

    NYT May 21 2005 Greenspan Is Concerned About 'Froth' in Housing

    It reports in part:
    Mr. Greenspan acknowledged on Friday that many people were "reaching" to finance their purchases.

    But he predicted that housing prices were unlikely to decline much, if at all.

    "Even if there are declines in prices," he said, "the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased before prices actually literally go down, are going to have problems."<<

  10. Artificially injecting demand into the markets - supported by less-than-qualified lenders - had nothing to do with the bubble and its very predictable burst then, uh?

  11. Re. above comment - I meant borrowers, obviously.