I guess I'm confused over the housing sector. Here's some confusion from the other day. DeLong discusses it here in the context of the 3 Fed dissenters.
Philadelphia Fed Presiendt Charles Plosser said in an interview that " This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process."
It is, I must say, remarkable that Plosser has managed to avoid learning that the housing bust since 2007 has been much larger than the mid-2000s housing boom, and that there is no overhang of overbuilt houses, rather the reverse:The story goes:
1) boom in residential construction (in blue)
2) spawns a bubble which takes on a life of its own
3) consumers use houses like ATM machines
In a comment at Crooked Timber Daniel Davies writes
The fact that houses became so expensive is hardly unrelated to the fact that financial means were created which then allowed people to bid the prices up further.
I don’t really agree, (surprisingly) – the price bubble was policy-caused. In the early 00s, when I started covering the UK banking industry in serious depth, the main upward driver of house prices was simply the fact that (as base rate plummeted to the historically low level of 4%!) they were so, so damn affordable – remember that mortgage rates went from nearly 10% to about 5% on a simple, vanilla standard variable rate mortgage, basically halving the monthly payment. The product innovations were a response to, not a cause of, the housing boom (in Spain, where financial regulation was and is very strict, they still had a housing boom on 100% vanilla products).Is what Davies says related to the Global Savings Glut? After witnessing the 1997 East Asian financial crisis, the Chinese - who avoided the worst because of capital controls - decided they would never ever be put in a position to be forced to go to the IMF and so built up their reserves. This caused mortgage rates to drop.
In 2005 what happens? Housing bubble deflates. Exports and business investment continue to grow. Unemployment level remains unchanged and people lose jobs and others are hired. Then in 2008 as the bubble deflates, financial institutions are put under pressure. Bear Stearns is bailed out. Lehman isn't and there's a panic, a run on the shadow banking system and a credit crunch. All sectors decline. Fiscal stimulus by the White House and Congress and monetary stimulus by the Federal Reserve stops the credit crunch and causes the economy to recover although growth is at a painfully slow pace and far from catching up to trend levels.