The Asset Bubble of 1996-2008

[cthulu2016]

I have always maintained that what we call the stock market bubble of the 1990s did not burst, ending the bubble, but rather shifted from stocks to real estate in a surprisingly orderly fashion. That it was a mega-bubble that involved more than one asset class.

I hadn't actually made this chart before, and having done so for my own education I thought I'd share...



I wanted to see the relative directions of house prices and the stock market. And whoop, there it is.

(The vertical scale is arbitrary, of course. The nominal moves in stocks were sharper than in housing, but housing was so much bigger in total economic terms. So just to have some grounding I used the implied relative size of the stock vs. housing bubbles in this chart: http://krugman.blogs.nytimes.com/2012/06/15/wealth-destruction/)

In narrative terms, here is the story my chart seems to be is telling.

1990- "Forget real estate. Stocks are the hot investment."
1997- "Wow, interest rates are pretty low and I'm so rich from my stock portfolio I ought to get a nicer house. Also, since the economy is pretty good more people outside the investor class are able to buy homes, so it's a good investment"
2000- "Oh no! The stock thing is over! Buy hey... look. Housing has been going way up for the last few years. Forget stocks, real estate is the hot investment."

More like passing a baton in a relay race than a cataclysmic event that ends the (delusional) mass psychology that reliable 10%-20% annual investments gains are an expected feature of the economy. A true burst, like 1929 and 2008, changes how the culture thinks about money and value, in fundamental terms. What happened in 2000-2001 was, in retrospect, more like a messy portfolio reallocation. "I have too much AOL stock and not enough houses."

[dkf]

1. Greenspan Wanted Housing-Bubble Dissent Kept Secret

http://www.huffingtonpost.com/mobileweb/2010/05/03/greenspan-wanted-housing_n_560965.html

As top Federal Reserve officials debated whether there was a housing bubble and what to do about it, then-Chairman Alan Greenspan argued that dissent should be kept secret so that the Fed wouldn't lose control of the debate to people less well-informed than themselves.

"We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand," Greenspan said, according to the transcripts of a March 2004 meeting.

At the same meeting, a Federal Reserve bank president from Atlanta, Jack Guynn, warned that "a number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida. Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on 'flipping' the properties--selling them quickly at higher prices."

Had Guynn's warning been heeded and the housing market cooled, the financial collapse of 2008 could have been avoided. But his comment was kept secret until Friday, when the central bank released the transcripts of Federal Open Market Committee meetings for 2004 and CalculatedRisk spotted it. The transcripts for 2005 to the present are still secret.

"The substantial run-up in house prices, which we have followed in Florida and also see in the populous Northeast and West Coast of the United States, may be at least partially attributable to unusually low mortgage rates influenced by our very accommodative policy," Guynn warned.

[bhikkhu]

2. And perhaps reaganism was the trigger?

on the theory that concentrating wealth on the top of the pyramid rather than the base makes for an inherently unstable structure;

then the tax cuts that began that redistribution of wealth - accelerating the concentration at the top, along with encouraging the wage stagnation at the bottom, basically increased both the relative size of "the markets" and their volatility?

[banned from Kos]

3. Most Americans were buying stocks and houses during the 90s - 2006.

You can't blame Reagan for the railroad stock bubble of the 19th century or the 1929 bubble burst.

Bubbles are an inherent part of markets. We are in a gold bubble now. And that is odd in a deflationary environment. But like the gold bubble of 1979-80 it is destined to burst.

[bhikkhu]

5. How much free capital is available to form bubbles affects volatility

...and the scale of the volatility relative to the scale of the economy as a whole.

Not that I'm an expert, but doesn't it make sense that the volatility we have had in the past 30 years and its widespread effect on the economy as a whole could have something to do with the volume of capital concentrated at the top? I suppose one could go back to 60's and bypass Reagan altogether -



- but the overall idea is that capitalism naturally concentrates wealth at the top, creating the kind of wild boom-to-bust volatility that plagued the markets before the fed was created. Capitalism concentrates wealth very efficiently, and progressive taxation (among other things) manages and mitigates that concentration.

You could say that at a 50% tax rate, volatility and growth were well balanced, but at 35% or less things begin to swing out of control.

[cthulu2016]

7. You are correct that bubbles require idle cash

And that there is thus an implied inequality component. The same dollar in the hands of the investor class or the working class will have different paths, and the worker is much less likely to feed an investment bubble. He'll waste the dollar on food or medicine or something silly like that.

On the other hand, what helped the housing bubble get started was that workers made real-dollar gains in the 1990s and (unlike stocks, which are not a basic necessity) everyone needs a place to live.

Another feature, and the key feature of the economy since 1980, is low inflation. That is also an investor class priority, and as implicated in the bubble fever as raw inequality.

[cthulu2016]

6. re: Bubbles are an inherent part of markets

In any market some things will sometimes reach prices that are not sustainable and that seem to exceed intrinsic value, so in that sense bubbles are an inherent part of markets.

But bubble-economies, the bubble tail wagging the economic dog, are not necessary. They are an inherent possibility but require some mismanagement to bloom.

Economy-wide bubbles appear to require cheap money. And the Fed can reliably strangle the stock market or housing market, or not, which is a policy decision.

For instance, the funniest thing about my chart is that stock and housing were both parabolic, in tandem, for a brief period that happened to coincide with balancing the federal budget.

And the truly ridiculous phase of the stock bubble was by monetary policy design! In October, 1998, some Asian hedge funds and banks got into trouble. Traders recognized it as the probable end of what many already recognized as "the internet bubble."

And Greenspan cut rates! The NASDAQ doubled from that point, even though it was unsustainable already. The chickens were trying to come home to roost, but were chased away.

My point is that political and monetary decisions are in the mix in such a way that no economy-wide bubble is inevitable.

The real question, to me, is the relative merit of bubbles and busts. A society that restrained bubbles would also restrain some "good" growth, which is bad. But what is the net effect? Bubble bursts are so bad that restraining growth slightly while avoiding bubble bursts may result in net higher-growth. Or not.

We are not likely to see that experiment, however, because capital would flow to bubble-friendly economies and the safe-and-steady economy would be forced to be bubble friendly to remain competitive.

[bhikkhu]

11. Good points - and note how the media portrays our current 2-3% growth

...you would think that it was an unmitigated disaster to not have some bubble-like growth spurt.

In the long-term, 3% growth is still unsustainable and destructive - it would double the size of the economy in less than a generation, in a world where the rates of resource consumption and resource constraints are already large problems.

[cthulu2016]

12. yeah, the RW is always saying that

our policies restrain growth and that our natural steady growth rate is 4-5%... year in, year out.

Amazing.

[cthulu2016]

15. Reaganism was the environment

The environment we have lived in continually since the early 1980s—an economy geared toward asset value rather than employment and production. The low inflation environment and low cap-gains taxes since 1980 is definately keys to bubble formation. (Both increase the real value of investment gains.)

And, as you note, the increasing concentration of wealth does swell what % of all money is in the investor classes and thus available to drive up investment vehicles.

The real trigger, though, was cheap money in a low inflation environment combined with the very real explosive technology-driven productivity gains of the period. (Greenspan was only one player, but he's the villain of the piece if we had to pick one guy.)

It is ironic as heck that we wanted to balance the budget to remove government pressure on borrowing, and thereby reducing interest rates. The brief period when both stocks AND houses were going up crazily happened to be the only period we have ever seen where the budget was balanced.

[Egalitarian Thug]

4. K&R An important piece of the puzzle. If they didn't operate under the radar,

I'd ask to identify when the top echelon of investors moved out of and into the markets. I think that would make it clear that all of this is not nearly as random or reactionary as we like to believe.

[cthulu2016]

8. It looks to me like a lot of "smart money" reallocation

from stocks to real estate was underway during the crazy last 16 months of the stock bubble. I would guess that profits from the millennial-frenzy sucker money that swept into the market in 1999 were going right into real estate.

[sagesnow]

9. I agree.

I agree with Chris Hedges: The 1% think the world is coming to an end so they are going to make their lives at the end as comfortable as they can- to hell with the unwashed 99% of the masses. They can use their wealth manipulate the market at will.

[HiPointDem]

10. +1.

[Egalitarian Thug]

13. Kicking out of forlorn hope. n/t

[cthulu2016]

14. Well, while we're waiting for enlightenment to dawn...

This is also a cool chart.


real net worth of households per capita
http://krugman.blogs.nytimes.com/2012/06/15/wealth-destruction/

"The chart also illustrates just how much bigger the housing bust was than the tech bust of the early Bush years, which is why conventional monetary policy wasn’t enough to cope — and why we needed rising government employment and spending on goods and services, not the unprecedented austerity we actually got. Finally, wealth growth during the Clinton years looks as if it was mainly real, with only a moderate bubble component; wealth growth in the Bush years was all bubble."

[cthulu2016]

16. .

[cthulu2016]

20. .

[Egalitarian Thug]

21. Nope. Been trying to get them to pay attention for 20+ years.They'd much

rather sit on their asses and watch Dancing with American Talent than understand why they are working harder and harder for less and less.

[girl gone mad]

17. The bubble was in private debt/bank credit.

Insufficient public sector spending is also partly to blame for the collapses and subsequent recessions.

[Auggie]

18. So what's next?

Stocks, Real Estate, or a mind-numbing, incredibly loud bursting bubble?

[cthulu2016]

19. A real bubble burst is a generational thing

To my way of thinking, a real burst burns people's fingers so baddly that they don't want any part of get-rich-quick schemes.

Like people who never owned stock again after the crash of 1929. (Like people who never put money in a bank again after the bank failures of 1932.)

The people who remember that nothing goes up forever probably have to die off. (The slogan of all bubbles is, "It's different this time.&quot

So I don't expect any investment bubbles the size of the housing bubble any time soon. That said, we probably don't have to wait a generation. Things are quite fast-paced these days. But I'd expect at least 10-15 years of subdued enthusiasm.

(Facebook is probably a good example.)