Wow, who was it you were taking issue with? Seems like a smart guy! :)
Seriously, I'm glad you have picked up this thread again, I had half a reply saved in my draft folder for months before I gave up trying to catch up with my email... I should say, though, that I wasn't actually arguing that this was definitely an explanation for the housing boom that I would endorse. The context was a criticism of Benjamin Kunkel's LRB review of David Harvey, and I was trying to defend the _theoretical coherence_ of a version of the concept of 'overaccumulation'. Whether it was actually in play in the 1990s-2000s would take some serious fleshing out and empirical work, and I'm genuinely openminded about it. The hypothetical nature of the speculation is clearer in the context of the whole paragraph from my original post (http://mailman.lbo-talk.org/pipermail/lbo-talk/Week-of-Mon-20110131/001191.html):
>The basic problem with the overaccumulation argument as put by Harvey
>circa 2010 is that it draws a sharp line between profitable and
>unprofitable, as if the economy is like a bucket with a finite
>capacity for absorbing capital 'profitably'. Harvey talks as if this
>point is steadily approached, then all of a sudden 'excess' capital
>needs a 'fix', financial or spatial or technological, or it is wiped
>out. But in fact profitability is a complex thing, and always relative
>to other returns, with the benchmark a risk-free rate of interest.
>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.
So when I say that there is not an absolute point at which 'profitable' turns into 'unprofitable', and that "profitability is a complex thing, and always relative to other returns", I think it's an answer to your point here:
>> 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.
This is a difference between a period where a sector or sectors are expected to outperform generally disappointing other returns, and a period in which nothing is expected to outperform, or in which people value capital safety and liquidity higher.
>>
>> 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.
I don't see that the two arguments are incompatible. Clearly a lot of people had to believe real estate returns would outperform those of other potential assets for them to put their financial resources into it. But the gap can begin to open up either because expectations for real estate spontaneously rise, or because expectations for the alternatives fall. And the reason why the gap is sustained might be different from why it opens up in the first place - because asset market movements tend to develop momentum.
>> 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.
And let's not forget (c), cheap, readily available finance - which really has to be somewhere in the core of the explanation.
> 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
Unfortunately it doesn't have much to say on the matter, because it's about asking the question of why the boom started in the areas where it did, not why it happened at all:
"The variables investigated include traditional income measure suggested by the Rosen/Roback model of spatial equilibrium, along with other variables that have been suggested by some as potential causes of the boom. Most prominent in this group are credit market factors such as subprime mortgage activity and federal low income-housing mortgage programs (FHA). One omission from this latter group is interest rates, as our empirical strategy is best suited to examining factors that vary across space and time. Mortgage rates are roughly constant across local markets and are best examined by other approaches." [p. 17]
Mike