In the latest podcast from Joe Walker, he discusses housing bubbles with Vernon Smith.
| The chart below, from, the Nobel Prize-winning economist Vernon Smith, should be put on a T-shirt or a prominently-placed billboard. It explains why the Great Recession was so ‘Great’. It explains why wealth inequality widened in its wake. It may explain why the US and other advanced economies seem to be stuck in the swamp of secular stagnation. And given that financial crises have been shown to drive political polarisation and an increase in the voting share of far-right parties, it at least partly explains why Donald J. Trump was able to ride a wave of popular resentment all the way to 1600 Pennsylvania Avenue. In short, it explains why not all bubbles are created equal.  When a housing bubble bursts, like the one in the US shown above, things don’t just go back to normal. Asset values fall against fixed long term debt, and equity collapses disproportionately. In many cases, borrowers are plunged into negative equity. This was the source of damage to household balance sheets that haunted the US economy for 5 years. According to CoreLogic data, in 2011, 11 million properties (or homeowners in 1 out of every 4 properties with a mortgage) had negative equity. |
