Economics and similar, for the sleep-deprived

A subtle change has been made to the comments links, so they no longer pop up. Does this in any way help with the problem about comments not appearing on permalinked posts, readers?

Update: seemingly not

Update: Oh yeah!

Saturday, January 30, 2010

To trail a forthcoming book review ...

(Oh yes I will you bastards) ... of Dean Baker's excellent "False Profits" (I really think Dean should be massively more prominent on the American Left even than he actually is; he has the very very unusual characteristic among American liberals, which characteristic is even more unusual among American liberal economists, of not spending half his time apologising for who he is. He's one of the few people who's prepared to just come straight out and say that Feldstein's clearly bullshitting about Social Security or that Mankiw's full of crap about the budget or whatever, without first doing half an hour's material on how 'scary smart' these guys are and so forth. It really is a breath of fresh air to read him. Oh Max, Max, where did you go, we miss you etc).

Anyway, as prolegomenon to said review, I'd just like to make one note on "bubbles" that really ought to be obvious, but which point appears to be consistently missed in the relevant policy discussion. It's that equity market bubbles and real estate bubbles are very different entities, and that it's much, much more forgivable to be wrong about a bubble in stocks than a bubble in real estate.

Basically, if you think back to 1999-2000, the Internet really was changing a lot about the world. Lots of very valuable things really were being invented, and although the view that this justified "new paradigm" equity market valuations turned out to be wrong, it wasn't intellectually repulsive for the most part. There actually have been lots of world-changing technologies and there have been plenty of new economic paradigms which significantly changed the game. Meaning that there was a sensible two-way debate to be had about what the market price/earnings ratio ought to be.

Rent, on the other hand, is rent and there have been basically no game-changing innovations in the practice of land ownership since the Domesday Book. Anything which might have justified a new paradigm in land valuations would have had to have showed up in the rental market as well (Dean makes this point, but perhaps not in so many words). Unlike the price/earnings ratio on corporate stocks, which can depart a long way from the interest rate and be justified by future developments, the rental yield on real estate has to be within a few points of the long term real bond yield. When it gets much lower, as it did in the 2000-2006 boom, then there can be no sensible question about whether we're in a bubble situation - only about what policy response is appropriate.

I think this means that the optimum policy response function, if we're to take Dean's quite plausible view that such a function should have anti-bubble policy incorporated alongside anti-inflation and anti-recession aims, needs to very much distinguish between stock market bubbles and real estate bubbles. Real estate bubbles are much easier to spot, and much more destructive when they happen (because real estate is much more widely owned than equity shares and much more generally held by leveraged investors), so anti-real-estate bubble policy ought to be much more aggressive than anti-stock-bubble policy. At the moment, lots of people who ought to know better appear to be combining the two under the category "bubbles" (or, worse, using the difficulty of making a profit by shorting the equity market as a reason for not having an anti-real-estate bubble policy at all).
16 comments this item posted by the management 1/30/2010 05:09:00 AM

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