July 19, 2008

Housing and the Madness of Crowds

I was intrigued by this article in The Atlantic that discussed the housing bubble, and in a sort of Malcolm Gladwell-esque way, suggested that economic "bubbles" might be treated like viruses, and prevented in analogous ways to how we work to contain the spread of diseases.

I was of two minds about the premise: on the one hand, I suspect we will be able to eliminate bubbles easily once we eliminate human nature. But another part of me feels that—as Professor Sowell himself has suggested—a certain level of economic literacy is required for any citizen to function effectively in society, and that teaching our kids a bit more about the dangers of "over-exuberant" speculation might really work to take the edge off of economic highs and lows.

Thoughts? Can bubbles be avoided? Will the housing collapse have far-reaching effects over the next several years? And given how ingrained this sort of behavior is into human nature, is there something we should be teaching the youngsters that might do them any good? (Or will they, as young people are wont to do, insist on learning the hard way?)

(X-posted at Right Wing News.)

Posted by Attila Girl at July 19, 2008 11:06 AM | TrackBack

Yes, teach more economics. Yes, make sure that laws aren't passed to make sure banks give out bad loans. Yes, don't let fannie mae and freddie mac get out of control. And yes, don't bail them out or they will do it again.

I know grown ups who were told it was a bubble, and they didn't listen, because they knew that iif their risk didn't pay off, they would probably get a bail out. They knew they wouldn't be expected to be resposible.

Posted by: silvermine at July 19, 2008 11:48 AM

I gotta defer to Silvermine's wisdom. All I know is that I've been responsible, and didn't take a loan that I couldn't afford to buy a house I couldn't afford. And now I'm going to get penalized for being responsible? WTF??

On the other hand, once the bubble completely collapses and the house market finally finishes tanking, I might be able to find a real deal.

Assuming someone will loan me money...

Posted by: I R A Darth Aggie at July 19, 2008 12:23 PM

Teaching more economics would be a good thing, but it probably doesn't do much good unless the person first learns some basic math. You need at least some level of comfort with numbers and with mathematical reasoning.

Equally important is the ability to read & understand documents that are complex and intimidating-looking....like loan agreements.

A big problem with bubbles is that most of the media has collective ADD, and doesn't do well in providing historical perspectives. How many publications or TV shows were suggesting, circa early 2007, that the housing boom might not go on forever?

Posted by: david foster at July 19, 2008 12:27 PM

The effect will probably be minimal except for those poor sods directly under the hay bale. We all know people crushed after the S&L collapse and dotcom billionaires that retired and now live in genteel poverty in Oregon but land has intrinsic value and even foreclosed properties are worth something, lesser fools, or as like to call them "greedy bastards", will make money on them.

Tulips are a major cash crop in Holland these days and helping out land speculators was one of the things that got Alexander Hamilton shot. He insisted on funding the revolutionary war debt at par which helped out speculators that bought the paper from soldiers at a discount. Outrage at this was one of the issues that caused the Democratic party and when Jackson and his Specie Circular... Oh never mind.

The only way to avoid these things is to not participate and the last time I looked people needed places to live. You can try to eliminate the greater fool with transparency as they try to in the stock market but as any one with Indy Mac stock will tell you transparency is no substitute for clairvoyance.

As far as I can tell people began to view their homes as investments and traded up based on an expected rise in equity and ignoring the cost of debt service. When the cost of debt exceeded income the lien holders issued what essentially amounts to a margin call and the owner was forced to sell. When supply crossed the demand curve the house of cards collapsed and the foreclosure follies began.

Short of re-animating Henry George I don't know what we can do, I have a stock broker that turned a personal fortune into a tidy nest egg and a son in law presumptive who is a licensed financial adviser that works as a bartender. After bankruptcy and squandering the income from a lucrative career, I have learned one thing don't borrow more than you can afford to pay back and don't gamble more than you can afford to lose.

OK that's two things, did I mention I am the CEO of IndyMac bank? Oh and its also better to play with the house's money.

Posted by: Sejanus at July 19, 2008 01:52 PM

Yes, hindsight is 20/20. Free markets function best when free. Resist the urge to go to the dark side.

Posted by: Darrell at July 19, 2008 01:58 PM

Bubbles and business cycles are caused by the inflationary monetary policy of the Federal Reserve central bank - an government institution created by Congress. When the Federal Reserve manipulates interest rates a disharmony between the plans of businessmen and the time preferences of consumers occur. If you a interested in this topic, I encourage you to visit www.mises.org. The great economist Ludwig von Mises developed this business cycle theory and F.A. Hayek later won a Nobel prize for his elaborations on the theory. More government intervention into the economy will not make bubbles go away - it's what causes them in the first place.

Posted by: Brandon at July 20, 2008 10:30 PM

I apologize for the typos. It's 2:30am.

Posted by: Brandon at July 20, 2008 10:32 PM

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