>> It's quite possible to make a case that from the late 1990s
>> money-capital (ie accumulated savings seeking a return) grew faster
>> than the opportunities to make the returns available (adjusted for
>> risk) at the beginning of the period. There was therefore a tendency
>> towards higher risk, higher return investments, bubbles, and new forms
>> of intermediation that promised a higher rate of return for a given
>> apparent risk and liquidity profile, while shifting risk to the
>> intermediator (and ultimately its creditors should it collapse).
>> Overaccumulation is this kind of tendency, rather than an absolute
>> thing.
>
> Okay, but it doesn't follow automatically that disappointing rates of
> return to money-capital will result in a greater (system-wide)
> appetite for risk. I mean, if you think of a classic case of a deeply
> depressed economy, the rates of return are disappointing but people
> *flee* from risk.
>
> My interpretation of the bubble process you describe (at least for the
> US) is a bit different. I think the "first cause" of the 2000's bubble
> was simply the formation of expectations among home-buyers that house
> prices would rise at fantastic rates - perhaps generalizing from
> localized examples of this from the boom years of the 1990's, when
> certain localities received sudden influxes of very wealthy people,
> resulting in massive - but stable - increases in home values. Once
> those expectations became generalized, it turns out that the complex
> financial stuff that claimed to disperse risk - MBS, CDOs, etc. - was
> more or less rational. I think the data show that most of those
> financial products actually would have paid off if home prices had met
> the forecasts embedded in the Wall Street models. It was the
> hysterical forecast of price appreciation, not the "hiding" of risk
> (it was never really hidden), that constituted the bubble. In other
> words, this was about a classic national mania - a la Charles Mackay -
> rather than the necessary outgrowth of evolutions in rates of return
> to money-capital.
>
> Fundamentally, I'm not denying that subjectively investors despaired
> of low returns in the era of low interest rates and sought ways to
> "safely" climb the risk spectrum. But that wish would have simply
> remained a wish and they would have simply swallowed their despair had
> there not been (a) a pre-existing appetite for risk and (b) an ongoing
> housing bubble "from below" to invest in. It's the latter two factors
> that really explain the bubble.
It looks like this new paper by two economists at the Wharton school offers some support for this view. Haven't read the paper yet, just the abstract:
http://papers.nber.org/papers/w17374#fromrss
> Anatomy of the Beginning of the Housing Boom: U.S. Neighborhoods and
> Metropolitan Areas, 1993-2009 -- by Fernando Ferreira, Joseph Gyourko
>
> We provide novel estimates of the timing, magnitudes, and potential
> determinants of the start of the last housing boom across American
> neighborhoods and metropolitan areas (MSAs) using a rich new micro
> data set containing 23 million housing transactions in 94 metropolitan
> areas between 1993 and 2009. We also match transactions data with loan
> information, enabling us to observe household income and other
> demographics for each neighborhood. Five major findings are reported.
> First, the start of the boom was not a single, national event. Booms,
> which are defined by the global breakpoint in an area's price
> appreciation series, begin at different times over a decade-long
> period from 1995-2006. Second, the magnitude of the initial jump in
> house price appreciation at the start of the boom is economically, not
> just statistically, significant. On average, log house prices are over
> four points higher during the first year of the boom relative to the
> previous twelve month period for both MSAs and neighborhoods. There is
> no evidence that price growth was trending up prior to the start of
> the boom. Third, local income is the only potential demand shifter
> found that also had an economically and statistically significant
> change around the time that local housing booms began. Contemporaneous
> local income growth is large enough to account for half or more of the
> initial jump in house price appreciation. While these estimates
> indicate that the beginning of the boom was fundamentally justified on
> average, they do not imply that what followed was rational. Fourth,
> there is important heterogeneity in that result. Income growth is
> large and jumps at the same time as house price appreciation in areas
> that boomed early and have inelastic supplies of housing, but not in
> late booming areas and those with elastic supply sides. Fifth and
> finally, none of the demand-shifters analyzed show positive
> pre-trends, but some such as the share of subprime lending, do lag the
> beginning of the boom. This suggests that key players in the lending
> market more responded to the boom, rather than caused it to start.