September 26, 2007
Another Bubble Fan
You're never alone on the Internet. I felt lonesome when I came out as pro-bubble in a comment on the subprime contretemps. [No, I think subprime has passed contretemps and become a full kerfuffle -- somebody alert Mr. Taranto.]
Daniel Goss is interviewed today on TCSDaily. He is the author of a book: "Pop: Why Bubbles Are Great for the Economy."
In the interview, he sounds like me, well, me if I were really smart:
TCS: So what is the other - and hopefully happier - side of the story?GROSS: Well, the way that new infrastructures get built in this country is frequently through investor enthusiasm. The government may help roll out new technologies, but we don't have the government putting up telegraph lines or stringing fiber optic cable that connects people's homes to the internet.
These activities don't proceed in a rational, easy-going way. They move in fits and starts. It's the bubbles that lead to this very rapid roll out of a new commercial infrastructure, one that businesses can plug into and use, like the telegraph or the railroad or the internet.
So bubbles create platforms for growth and innovation that help propel the economy forward.
TCS: And what happens after the bubble bursts?
GROSS: You get excess capacity, which leads to competition that brings prices down for normal users, which creates the climate in which somebody can come along with a new business idea that instantly plugs into a large user base.
[...]
GROSS: And I think this whole culture of re-financing survives the bubble. A lot of the press today is about people who got in trouble by refinancing, by getting these weird mortgages that re-set at higher rates. But for every person that got caught up in that, there is another person or perhaps more who did very well by simply exchanging a fixed rate mortgage for one at a lower rate and doing it again and again and saving themselves upwards of thousands of dollars.The mechanisms to do that, the mentality to do that, the idea that individuals watch interest rates and if they fall 50 basis points, 100 basis points, re-finance, that's new. The mechanisms are now there to do that quickly, which did not exist in the '80s or even the early 1990s.
Going forward, that has to be a big economic positive
It's a great piece. He says that while bubbles are not confined to America, that Americans have a particular ability (comparative advantage?) in processing and clearing bubbles.
He's already looking forward to the next bubble in alternative energy.
Who is this Daniel Gross, another John Shibley?
People who refinance their fixed rate full-term mortgages "again and again" are NOT saving themselves thousands of dollars. They're costing themselves tens or hundreds of thousands in additional interest costs by extending the maturity date of their loan further and further. Anyone who's studied an amortization chart (look it up) knows that fixed mortgage payments are front weighted with interest and back weighted with principal. If you want to pay thousands of dollars per year, year after year, just for the privilege of still owing the same amount, then go ahead and refinance every time the rate drops "2 percent or more" (the common refinancing rule-of-thumb.) And how often does this happen? For fixed rate mortgages, exactly four times in the last fifteen years and zero times since the Jan-01 to Jul-03 drop.
The idea of making low monthly payments and jumping from one flaming log in a river to another "again and again" without ever paying the debt in full and reaching the safety of dry land... THAT'S new.
Posted by: johngalt at September 26, 2007 3:47 PMGross clearly makes the point that the fruits of the housing bubble are more difficult to find than those created in the dotcom frenzy of the 1990s (those were the days -- let a developer enjoy a little nostalgia).
I think Gross is completely correct to say that the consumer mortgage market became more efficient. The first couple of mortgages I got were done the old way: thousands in closing costs, long delays, and an afternoon at the title company. I refinanced a couple of times with web applications, fast service and competitive costs. It may not rival VP Gore's Internet, but it is a big improvement.
JG, you sound like Grandpa Simpson on this: "In our day, we had 30-year fixed rate mortgages and we liked it!" I would say that this increase in efficiency is enough to reduce your 2% rule-of-thumb.
While I'm playing contrarian, I got one of those "crazy, dangerous, louche" interest-only mortgages that send the pinstripe crowd into apoplexy. I think it rocks. It provides choice. I can put more into a tax-deferred 401K and enjoy the tax deduction for my interest for 15 years. Paying down the principal becomes an investment choice.
At the base, I think that's why I'm bubble happy. Bubbles leave choice in their wake. This Hayekian approves.
Posted by: jk at September 26, 2007 5:23 PMWell, we all need to be more precise when using "bubble." Gross isn't talking about a "bubble" in the same way most people do, and when he says "economists" don't like them, he forgets that Austrian economists talk about them in Austrian Business Cycle Theory. The business cycle advances in spurts as individual entrepreneurs bring new information to markets (new products, new awareness of products, new ways of doing things). These uneven advances are because of imperfect information, which is the same reason "excess capacity" or other errors will occur. There are "bubbles" throughout an economy: even one with continual, steady growth is comprised of uncountable declines offset by uncountable advances. ("Uncountable" doesn't mean so numerous that they can't be counted, just that the numbers cannot be counted with precision.)
Real bubbles are the product of government intervention, because they introduce systematic errors into markets. A market error occurs when a developer decides to buy land and eventually fails for whatever reason, because he misjudged economic conditions. A systematic error is when the Fed keeps interest rates too low, encouraging the developer to buy land he wouldn't have bought otherwise.
That said, I really must fault Gross for "looking foward" to an alternative energy bubble. It's not going to be pretty, because whatever happens will be the fault of an inefficient market where government stomps on the gas and later slams on the brakes. "There's been fantastic growth in wind, solar, ethanol," and certainly people will follow along and invest in these -- which deprives the economy of their investment in things that actually work.
Posted by: Perry Eidelbus at September 27, 2007 11:18 AMOh, and on the mortages: let people be stupid as they wish in refinancing. As long as they don't hurt the rest of us, what is it to us?
Some people are willing to pay significantly more in the end, in exchange for a lower monthly payment. To them, it's worth paying sometimes a lot more in the end so they can buy more things today (that's usually what happens, jk, most aren't prudent enough to put more into a 401K). I think it's a terrific society that allows them to determine their own degree of consumer choice -- and be the only ones to suffer the consequences of their actions. I personally don't think it's "stupid" or "imprudent," since it's a person's particular choice.
What *does* affect me, though, is the central bank that encourages and rewards consumption spending, and punishes me when trying to save money. That's been the real issue with the housing situation, and it seems so far that only Austrians and monetarists recognize that.
Posted by: Perry Eidelbus at September 27, 2007 11:29 AMPart of being pro-bubble was to bristle at the pejorative term. "It WAS NOT a bubble!," has been my mantra since the Nazz plunged. But language evolves, and people clearly think that every volatile business cycle is a bubble.
We agree on choice. If you want to tell people when they can borrow, you may as well tell them not to smoke or eat trans fats.
Posted by: jk at September 30, 2007 1:55 PM | What do you think? [5]