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Bubbles

By Matthew Yglesias on October 15, 2008 at 4:23 pm

"Bubbles"

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Mark Thoma says:

If we didn’t identify one of the largest bubbles in memory, and for the most part people didn’t, I’m not confident we will be able to come to any kind of consensus about “ordinary” sized bubbles before it’s too late.

I have no objection to the policy idea he’s putting forward, but I’m not so sure it’s true that “for the most part” people didn’t recognize a housing bubble once it had been under way for a while. Part of the weirdness of the housing bubble was that even if you believed there was a bubble, there was relatively little you could do about it. You can’t “short” housing in any easy way. And doing something like selling your house, and moving your family into a rental with the expectation of buying back into the market after the bubble pops involves huge transaction and search costs. Looking for a new place to live is a pain-in-the-ass and moving is both annoying and expensive. It’s much easier for a person who thinks real estate prices will rise to become a speculative buyer than it is for someone who thinks real estate prices will fall to become a speculative seller. It seems to me that that mismatch was one of the driving forces behind the real estate bubble.

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