Friday, May 27, 2005

Paul Krugman: 'Running Out of Bubbles'

In today's Nytimes op-ed section there is an extremely informative opinion by economist Paul Krugman regarding the current housing bubble.

Here is a quick summary of what he says:

  • There is a housing bubble
  • The housing bubble is generally concentrated in big wealthy areas (notably California & Florida) .
  • If housing bubble will burst
  • When the housing bubble bursts "the economy would still be in big trouble"
  • If housing prices start declining "pushing the economy right back into recession"
  • Some say that there is no bubble. "But someone will always come up with reasons why seemingly absurd asset prices make sense."
  • Alan Greenspan now ' admits that we have "characteristics of bubbles" in the housing market, but only "in certain areas." '
  • " The important point to remember is that the bursting of the stock market bubble hurt lots of people - not just those who bought stocks near their peak. By the summer of 2003, private-sector employment was three million below its 2001 peak. And the job losses would have been much worse if the stock bubble hadn't been quickly replaced with a housing bubble."
Krugman concludes with saying that the economy will head into a recession unless there is a new bubble "to take its place." Finally, he concludes that it is "hard to imagine what that might be." Krugman is right on the money.


  1. This is a clear sign of things coming to an end (i.e. the bubble is about to pop). Krugman is one of the best economist in the world and a man whose opinion is to be respected.

    Anyways, I was just going to buy a home but thanks to info found on this blog and in "The housing bubble-blog" I realize that I am better of waiting and riding out this insanity.

    It was obvious this wouldn't last though, if it lasted, only rich people would be homeowners.

  2. "Krugman is one of the best economist in the world and a man whose opinion is to be respected."

    Precisely. The current economic situation in the US is simply unsustainable. There is unsustainability in the housing market, trade deficit, budget deficit, consumer debt.

  3. FYI, there is an article by a Mr. Paul McCulley (author mentioned by Krugman) which sheds some light as to why the FED would create a housing bubble.

    "Next, on excess risk-taking, the FOMC said:

    “In their discussion of financial market conditions, participants noted that investors anticipated further increases in the federal funds rate over the coming year, but intermediate- and long-term interest rates along with financial conditions more generally had remained quite supportive of growth. A few participants commented that the generally low level of interest rates across a wide range of maturities and the recent flattening of the slope of the yield curve (measured as the spread between ten- and two-year Treasury yields) might signal that expectations of longer-term growth had been marked down.

    Some participants believed that the prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets evidenced by quite narrow credit spreads, a pickup in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes and condominiums.”

    It also suggest some possible solutions in the Microeconomic sense and not in the Macro sense the Fed is used to employing.


    Link for article mentioned above

  5. Nice blog - one nitpick. Style-wise, the white text on black background is nice, but practically, it's tough on these 40 year old eyes, with the high contrast. (It's a little easier to deal with the blue and magenta in the sidebar. I'm actually highlighting your whole page in order to be able to read as quickly as I normally would.

  6. Thanks for the 'Style-wise' comment. I am aware of the white on text on black background being hard on the eyes. I will look into other styles.

  7. With the French rejection of the European constitution the USD will probably rise relative to the Euro. More hot money may chase the USD keeping the bubble inflated. It looks like Europe will not raise its interest rates.

    The next bubble will be wage inflation to make the RE affordable and then the cycle can continue.

  8. Plenty of goldbugs think the next bubble will be precious metals.