Vernon L. Smith, a Nobel Prize Laureate in economics and a graduate from Harvard talked about the housing bubble and the bank balance sheets as important issues in the Great Recession. Here are some notes of what he proposed:
This is a macroeconomic problem.
Proposition #1: The Great Recession (2007-2009) as a Household/Bank Balance Sheet Crisis:
Housing is the most instable component. It gave a new perspective for research that economists did not have. In the Great Recession the housing decreased more than anything. From 1997 to 2005 a momentum (the rate of acceleration of a security's price or volume, Investopedia) was driven. In 1997 no more capital gains taxes on houses up to half million dollars. The Bubble started in 1991.
Proposition #2: Disequilibrium in the Great Depression (1930-1940) as a Household/Bank Balance Sheet Crisis:
Disequilibrium in the Depression was fueled by a massive flow mortgage credit.
There was too much OPM (“Other People's Money”) that tripled from 1921 to 1940. Decline in value against fixed debt was large, but less severe than in Great Recession.
The Value/ Debt ratchet: As housing values rise mortgage debt rises in step, bubble-like, 1997-2006. With a drop in housing value mortgage debt remains fixed.
According to the chart the income and net worth increases from 2004 to 2007, but declined from 2007 to 2010.
In 1997 Bill Clinton had a huge popular acceptance: “everyone loved him”, but the bubble started since his government.
Proposition #3: Housing as the U.S. business cycle:
Housing construction as a percentage of GDP since 1920: housing led in 11 of past 14 recessions. There was a trade-off. Housing has been predicting recessions but it is not the rule.
Post World War II Recession did not damage household/bank balance sheets, but both the Great Depression...