The housing bubble can only really be understood in context of the tech bust.

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When tech went bust, all the capital that left the tech area had to go somewhere.

The (somewhat appropriate) concern of the Greenspan-ites was that the capital would go overseas. To find a place to park the capital left homeless by the tech bust, they intentionally worked to inflate the US real estate sector.

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Also, "excess money" is not a problem. It's called capital accumulation, and it's how we fund private sector growth.

A green energy bubble would've been nice.

I agree with Petey.

I think the housing bubble began in the 90s, coincident with the tech bubble. I think if you went back and looked at the earlier big bubbles in the U.S., you'd see that each technological bubble had a housing bubble accompanying it.

And I think that low interest rates - caused by the worldwide "savings glut" and allowed by Fed policy - let the housing part of the tech bubble continue for 7 years after the tech bubble itself burst.

Liz got first; a green energy bubble would be something.
If, instead of acres of empty housing, there were acres of solar plants in the deserts and hundreds of miles of new transmission lines from the deserts and windy plain areas to our cities? Even if there was some sort of market collapse from an over-build, we'd still have all the useful infrastructure.
Another would be a more retro bubble, in train transport (back to the 1880s), with municipalities getting electric trolleys and the US getting some supertrains.
The bush years really are the wasted years for America...

Ok, this is obvious, but we did get SOMETHING -- namely, lots of houses in suburbs that shouldn't have existed in the first place. But that's still something. Eventually, this will lead to lots of people being able to afford homes that they wouldn't have otherwise been able to, absent the housing bubble. In this sense, to the extent that the bubble led to lots of new construction, isn't it actually better than some other possible bubbles?

Yes on green energy, but let's be clear: the mechanism was there, in potential: global warming. In the absence of Kennedy and O'Connor, a Gore presidency could conceivably have led to a commitment to reducing carbon output, and all that int'l cash could have been put to use rebuilding America.

Instead we got WPE.

Another reason the two bubbles are so intertwined is our bankruptcy laws. In FL if it was obvious that you were about to lose everything in tech, you would take what you had and buy an expensive house, then declare bankruptcy.

Ryan gives a nice go at looking on the right side, but I don't think it's right. Most of the bubble houses aren't well-built, aren't in affordable locations, and won't survive the coming decade of disuse. It wouldn't surprise me if 50% of the houses built from 2005-2008 end up being demolished by 2025.

An infrastructure bubble generally. Instead of the Bush tax cuts we could have used the Clinton surplus to fund a huge expansion of public works contracts, including green energy but also (let's say) levies around New Orleans.

And so we see another example of the "elite circles have different concerns than normal Americans" problem raised when Ezra Klein worried that, because in most of the US it is primarily the poor and disabled on the bus, but in DC and New York where so many "opinion makers" live, far more of the middle class uses public transport, its therefore an "elite" thing to be in favor of better public transport.

It takes quite a high average level of education to fall for the savings glut nonsense. Most ordinary people understand the housing bubble as bankers and others playing financial games to create paper wealth that never represented much real wealth ... and, of course, the ordinary people, without the trained incapacity of a smattering of training in mainstream marginalist economics, are far closer to understanding what was going on.

The correct answer, of course, as other people have mentioned is green tech. It's the most promising and most needed technological advance that exists at the current moment.

The problem with what Petey says is that a fairly small amount of that excess capital goes towards actual growth. Most of it results in inflation on already existing investments, which results in public companies being forced to act in ways that are very damaging to the economy as a whole.

The problem is the declining wage base. And yes, excess capital does contribute to that problem.

Not only did the tech bubble leave us with the tech sector, it left us with billions of dollars of in-place fiber and other toys, much of which is only now starting to be used near capacity.

The housing bubble left us with badly-built houses, many of which have already been stripped for scrap metal, and that much less gypsum, softwood, copper, glass, and so forth to actually use.

So sure: green tech. And biotech. And climate-change mitigation. The numbers involved are so huge (especially if you count the leveraged part) that you could have funded pretty much everybody's wish list.

Which, just by the way, is an ironclad answer to anyone who still blathers about how dealing with climate change could impinge on economic growth: the banking industry just threw away $4 trillion on nothing at all; how could saving the planet do any worse?

Petey got it in one. As the stock market tanked in 2001, people had to put their money somewhere, and with interest rates extremely low thanks to Greenspan and the Fed, real estate looked safe. It is pretty rare to lose money in American real estate, and to a risk-averse investor community it looked like a sure thing. Expand the market via subprime and voila. Bubble in a bottle.

Great comments. I say ditto to you all. It is not, however, too late to build an alternative energy industrial complex. We already have the infrastructure in place to shovel tons of money towards well-connected companies. Let's just shovel the green in a more green direction.

Ryan is right: we didn't get nothing, we got housing. Ideally, following this bubble, it should be easier to afford housing.

Also, why do we assume that all of this money went to new construction in distant suburbs? There was plenty of money spent on flipping old houses in inner suburbs and building condos in cities.

And even in the case new construction in distant suburbs, with some investment, those suburbs could be converted into sustainable communities or recycled so that their materials do not go to waste.

Liz wrote:
A green energy bubble would've been nice.

There was a green energy bubble. Green energy bubble along with other tech. Look at the max chart for Ballard Power (BLDP). I made lots of money shorting Ballard.
Also Astro-power (now defunct) I made money long on Astro-power.

Here's my question about this. (Maybe if I'm lucky Ezra, you can pass it along to Krugman on the Journolist. heh.) Greenspan gets a lot of blame for there being too much loose money. I get that. Do the Bush tax cuts deserve any blame for all this speculative money? You're talking about billions of dollars, disproportionately in the hands of the people who needed someplace to invest that money rather than spend it. Is there any way to model the impact of the Bush tax cuts on the housing bubble?

I know it's a minor point within the Surowiecki quote, but still: I'd like to cite Louis Brandeis's "Other People's Money, and How the Bankers Use It" in response to Surowiecki's description of J.P. Morgan. Here's Brandeis:
http://www.law.louisville.edu/library/collections/brandeis/node/198

He had two main arguments in this context:

1) That the great banks never actually helped establish any businesses, nor to fund risky enterprises. They only came in and provided funding after entrepreneurs had taken on real risks. Banks only came in when success was assured.

2) That Morgan's main work was to create monopolies out of other, smaller companies.

Check out the Ford and Graham Bell examples in the Brandeis article.

Whenever I see Morgan venerated, I feel duty-bound to keep Brandeis's memory alive.

There just aren't a lot of sectors that could absorb that much money. I can think of tons of public works that *collectively* make up a Liberal Valhalla - trains, a new health sector and so on - that are big enough together and would've left us with something in the end, but the truth is, there was enough money being tossed around to fund all that stuff about 20 times over. So, no... no other single, narrow sector comes to mind.

It has to be broad - something that touches a lot of sectors, basics: food, shelter, wealth, etc. Green technology, maybe? I think that's yet to come, really, but it's going to be transformative, one way or another.

The thing about bubbles is they definitionally a self-perpetuating cycle of overheated speculation and innovation. Unfortunately this time, we got a lot of innovation involving theoretical money - not very useful, but cutting edge in the financial world.

To me, this question becomes: why did those with boatloads of money look to save it in bonds, money markets, etc., instead of invest it in promising startups/stocks? Probably partly feeling burned from the tech bubble as others have suggested, low interest rates, but also the variety of financial "innovations" that have allowed the creation of AAA bonds out of risky income streams. We look at this as a response to the demand for these bonds, but it works both ways, because this created a lot of seemingly safe investments with good returns and thus improved their appeal relative to stocks.

Two words: government borrowing.

That is the alternative to private borrowing. If the government had borrowed more, it could have spent on worthwhile consumption (e.g. a decent welfare state).

It's worth noting that there are also reasons why the bubble grew in this way, on this asset, including changes in bankruptcy law, and the general institutional background, like ratings agencies. In a different background, other things would have inflated.

> It's not that we found a
> new sector to lavish with
> money and just got
> overexcited. It's that we
> had too much money -- that
> "global glut" you sometimes
> hear about, or the "giant
> pool of money" that This
> American Life famously
> tracked -- and had to find
> a way to spend it. The
> housing bubble was a bad
> solution to a problem of
> excess money, in other
> words.

The problem is that to make that statement is to immediately raise the question "what is money".

That's a question that hasn't really needed to be asked since the concepts of money and financial instruments stabilized in the 1600s. But in the Atlantic world up until 2002 "money" was always backed by something of real value to human existence, whether that was the mills of Pittsburgh, the looting of a distance colony, the brainpower of a nation's scientists, or whatever. The 2002-2008 housing/FIRE boom was based on nothing at all - just hot air and gambling markers.

So now we ask again: "What is 'money'"?

Cranky