Re: yesterday's post on the rapidly collapsing subprime mortgage market, Kevin Drum today has more, this time brought to us by the folks at Fortune. Key quote from Kevin:
This is pretty similar to the way investment banks managed to keep the dotcom bubble alive for a couple of years too long in the 90s. Analysts at brokerage firms were supposed to be neutral in their recommendations -- in theory, there was a "Chinese wall" between analysts and traders -- but in fact the wall had long since broken down and there were tremendous pressures to oversell stocks their firms had an interest in. Unfortunately, it took a while for everyone to figure out that the analysts had become little more than carnival barkers, and that allowed the bubble to get wildly out of control.
Given everything I've been reading lately, I don't have much hope for the idea that we're not in for a repeat performance. The problem, of course, is that a collapsing housing bubble will have far greater consequences for the economy than a collapsing tech bubble once did.
I'd really love it if someone could show me what I'm missing here. Really.
UPDATE: Dean Baker:
The government's data show that, until 1995, house prices almost exactly tracked inflation (i.e. they did not increase by 2 percentage points more than inflation every year). Robert Shiller has constructed his own index that shows house prices had tracked inflation since the 1890s until 1995. That is the reason that Shiller and I believe that the 50 percent run-up in real house prices over the last decade constitute a bubble.
Until the mid-1990s, buying a house wasn't an investment. It was a form of financial security, not a vehicle for generating extraordinary profits. How so many people were so rapidly convinced otherwise.... then again, I was convinced that "the internet had changed everything immediately" so who am I to talk?
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