Running Out Of Bubbles

Paul Krugman, who no doubt has read Fixer's posts (Hell, he's in one of 'em), here and here, on the "housing bubble", comments further in today's NYTimes.

In July 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing.

As Mr. McCulley predicted, interest rate cuts led to soaring home prices, which led in turn not just to a construction boom but to high consumer spending, because homeowners used mortgage refinancing to go deeper into debt. All of this created jobs to make up for those lost when the stock bubble burst.

Now the question is what can replace the housing bubble.

Nobody thought the economy could rely forever on home buying and refinancing. But the hope was that by the time the housing boom petered out, it would no longer be needed.

Even Alan Greenspan now admits that we have "characteristics of bubbles" in the housing market, but only "in certain areas." And it's true that the craziest scenes are concentrated in a few regions, like coastal Florida and California.

Folks, I'm here to tell ya this is absolutely true. Me 'n Mrs. G just returned from "coastal California" where we did a 1031 exchange of properties (a way to take some profit and minimize capital gains tax) totaling nearly a million dollars. If you saw the places involved, you'd think we were nuts. Housing prices are crazy out here, but if ya wanta play, ya gotta pay. I think it's just that the money ain't worth jack shit any more.

One of (maybe the only) advantage of reaching our advanced age is that we bought our first house over thirty years ago just before California real estate prices hit the afterburner. Thank you, Lord. Prices have increased at a rising rate, almost exponential, in the last few years, way out of proportion to actual value. The house I am sitting in hasn't changed much in 25 years, but it would fetch five times what we paid for it. Great. We could live under a bridge with shopping bags full of cash.

I think my point is that us old farts aren't negatively affected by all this, but how the Hell do young families afford a home of their own? By going into crushing debt and risking their families' future, that's how. "Ownership Society", my ass. Lose a job, get sick, have bad luck, lose everything. Oh yeah, did I mention that it's harder to declare bankruptcy these days? The "Ownership" will be by banks and mortgage companies, big Republican contributors, all of 'em. They want to own you if you can't make your exorbitant payments.

So what happens if the housing bubble bursts? It will be the same thing all over again, unless the Fed can find something to take its place. And it's hard to imagine what that might be. After all, the Fed's ability to manage the economy mainly comes from its ability to create booms and busts in the housing market. If housing enters a post-bubble slump, what's left?

Good question. One thing is certain: the Ruling Class will have a tighter grip on this country, and the end of Democracy as we know it will be a lot closer.