me: >> I would agree with Shane: the high stock prices and the house prices >> in (say) August 2008 were totally on paper, a matter of promises and >> expectations.
Doug: > I've had this argument with Dean, who's big on the wealth effect. I'm not > sure how the stock of (largely fictitious) wealth affects the flows of > consumption. Mortgage borrowing and spending capital gains can affect > consumption, but not balance sheet wealth that's mostly money of the mind > (in Jim Grant's excellent phrase). It's not just "money of the mind" if markets attach a positive value to an asset. In fact, if I'm the only one who thinks my house is worth $1 million, it doesn't matter. But if the "experts" (assessors, etc.) say it's worth $1 million because similar houses sell for that price, that counts. In this "mark to market" world, I can use the equity on my (allegedly) $1 million house as collateral to get new loans. It doesn't matter if this market valuation of my house wouldn't last if large numbers of people with similar houses were to try to sell them: the experts say it's worth $1 million without taking into account the possible results of mass deleveraging, etc. They simply "call it as they see it" with a totally microeconomic perspective. > Yes, consumption in the recent boom ran > well ahead of income, but that was enabled by mortgage equity withdrawal - > people can't spend cash flow they don't have. ... it's not a matter of cash flow. It's the ability to use home equity as collateral (as "an ATM," as one famous economist put it). Having a valuable house increases one's reputation and creditworthiness. In my reading of the literature, there is a strong wealth effect on personal consumption for housing wealth, one much greater than for stock-market wealth. The latter mostly only affects rich people and most of them are less likely to treat a stock-market boom as "permanent" (since stock market prices are notoriously flaky). The housing bubble, on the other hand, affected the broadly-defined middle class at a time when there mass delusion (egged on by the real-estate industry, free-market ideologues, government officials, the media, even independent economists) that somehow house prices could only go up. The housing bubble was a "democratic bubble." -- Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own way and let people talk.) -- Karl, paraphrasing Dante. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
