Wednesday, May 5, 2010

Here's What Happens When You Don't Understand Bussiness Cycle Theory...

...and just sit in your office playing with equations. You can write columns that say there was no real estate bubble. From University of Chicago Professor Casey B. Mulligan
...maybe there was a good, rational reason for housing prices to increase over the last decade....According to the bubble theory, for a while the market was overcome with exuberance, meaning that people were paying much more for housing than changes in incomes, demographics, technology and other basic factors would suggest....But another interpretation is that a large fraction of the housing price boom was justified by fundamentals (and next week I’ll consider some of the specific fundamentals that may have permanently increased housing demand in the 2000s). If so, we are probably asking too much of the Federal Reserve and other regulators to accurately disentangle bubbles from fundamentals the next time that asset prices rise.
Not a hint of understanding of the business cycle. See the business cycle beautifully explained in 1937 by Fritz Machlup, here.

1 comment:

  1. That "large fraction" he mentions as being supported by the fundamentals wouldn't happen to be the same "large fraction" of housing prices that has subsequently evaporated into thin air following the bursting of the housing bubble, now would it?

    Nah, must be some other large fraction.

    Sure wish I could sit around in an Ivory Tower all day, getting paid to say nothing while appearing to do the opposite. Good gig if you can swing it, looks like.