Supply-side University on the Housing Bubble
Jude Wanniski claims any suggestion that there is a housing bubble is wrong. He does mention the fact that interest rates have fallen, which would tend to push up housing values relative to lease rates but not as much as we have seen in California. Wanniski claims there is a wealth effect explanation for high housing prices. But I have two questions as to whether his wealth effect explanation holds water. The first goes to whether wealth simply increases housing prices and not lease rates. After all, the bubble thesis goes to the fact that housing values have risen relative to lease rates by more than the decline in interest rates would suggest.
One might also wonder whether real per capita wealth has risen all that much. Wanniski turned to Paul Hoffmeister on the issue of real wealth with the results mentioned after Wanniski’s gold bug rant. Am I reading Wanniski correctly? He seems to be saying that nominal wealth grew by about 4% per year from 1952 to 1971, while real wealth grew by over 6% per year. But this period was not one of deflation. Wanniski then suggests real wealth did not rise from 1971 to 2004 even if nominal wealth grew by over 8% per year. My math tells me that average inflation was less than 4.5% per year.
But if Wanniski believes Hoffmeister’s claim that real wealth has not risen, how can he base his argument on rising wealth? Then again – anyone who thinks average real GDP growth has been less 0.5% per year is very confused.
Wannaski was clearly wrong. The bubble was sustained by NINJA financing; that is, No Income, No Job or Assets for home mortgages. The problem which popped the bubble was the stupidity of financing such a critical part of the American economy based on bottomless probabilities. Bankers and investors should have asked themselves three questions during that period: What are the risks? What are the probablilies? What are the trade-offs? They would have gotten their answer by asking themselves a few straight forward questions. Instead they made themselves believe in fantasy. The “Willie-Wonka” model of economics.
Danny L. McDaniel
Danny L. McDaniel is definitely the economic/political guru that he is billed to be. After watching his interview on TV and erading this article I can see why he has his mind on the past and eyes towards the future. America needs more people with strong manufacturing ideas and less of the “Green” fantasies.