HOME / the chat room: Real-time discussions with Slate writers.

Pop TalkDaniel Gross chats with readers on why economic bubbles are good.

Posted Thursday, May 10, 2007, at 5:56 PM ET

Daniel Gross was online at Washingtonpost.com on Thursday, May 10, to discuss his Slate article "Pop! Why Bubbles Are Great for the Economy," also the title of his new book. An unedited transcript of the chat follows. (View the Bubble Hall of Fame, take a Bubble Quiz, and buy Pop! Why Bubbles Are Great for the Economy.)

(Continued from page 2)

RSS

What's more, new products like housing index options were introduced (although very few people use them) during the bubble.

So if the end result of the housing credit bubble is that we have a home-owning base that is aware of the benefits of refinancing (and will do so when interest rates next cycle down) that could be a net positive for the economy.

_______________________

Boston: Lets by fair to Greenspan and others who suggested adjustable-rate mortgages -- they are good because they are a one-sided bet, and you always can refinance if rates are rising. That is just simply true. It's not the economists' fault if the media changes it to a headline saying "Greenspan says 'go get an ARM' " and people who have bad credit and can't ever refinance follow this advice. Filtering out foolish people is another useful tool of markets.

Daniel Gross: I'm with you to a degree. ARMs are brilliant in theory, less brilliant in practice when people use them as an excuse to get into a house they can't afford when rates re-set higher. The problem of this decade was that people had convinced themselves that interest rates would never rise and that home prices would never fall.

_______________________

Dayton, Ohio: So can we conclude that the "first mover" advantage is not always there? Sometimes it's better to hang back and wait for the pioneers to go bust, and then go in to taking advantage of the infrastructure and new commercial landscape they've left behind?

Daniel Gross: Absolutely. That is very much the point. Time and again, the first movers, who all thought they were going to make a killing, ran into trouble when they ran into ten other first movers doing the same thing. That's one of the distinguishing things about the U.S. economy. A good idea gets funded ten times. In the 1840s, there were three competing telegraph lines connecting Boston and New York. but there wasn't enough traffic to sustain one, and they had to compete furiously on price, which caused them to go bust. The same thing happened with railroads -- we had four or five transcontinental lines instead of one or two. And of course, with the Internet, there were so many copycats in every sector that it made it very difficult for companies to make profits when demand didn't materialize as expected.

_______________________

Baltimore: Re: Housing bubbles -- interesting piece in the New York Times on Tuesday (I think) about all the newly rich Irish buying up condos in New York that they plan to rent out. It seems that, despite skyrocketing real estate prices in Ireland, the rental markets have remained flat, so the Irish are looking to New York, where the rental market keeps going up. If we see a condo crash in New York (as we have in Washington and other cities), it could have quite an impact on Irish investors.

washingtonpost.com: An Irish Taste for Real Estate in Manhattan (New York Times, May 8)

Daniel Gross: I saw that article too, and it's quite fascinating. Ireland a decade ago was one of the poorer economies in Europe. Now it's generating sufficient wealth to invest overseas. And the subtext of this whole article is that the weak dollar -- which makes it so miserable for Americans to try to buy property in Europe these days -- is making it quite easy for Europeans to buy U.S. real estate.

_______________________

Annandale, Va.: I still don't get how the housing bubble deflation is good for the society at large. Your earlier answer to Rochester said high housing costs might spur migration away from the Big Apple to places like ... Rochester. That makes sense. But as housing values plummet in California, Florida and to a certain extent in the D.C. area, what is the greater public good served? It's not like these cities, with lower-priced but still pricey real estate, need a new net influx of people.

Daniel Gross: Good point. The point I make in my book is that it's hardest to see the benefit of bubbles right after the pop. We get irrationally exuberant, and then we get irrationally pessimistic. Back in 2001 and 2002, we were convinced the Internet was a scam. Well, e-commerce today is a gigantic, gigantic business. Google, a company that barely registered on the radar screen in 2002, is worth $150 billion and has a tremendously profitable business model. One hates to quote Donald Rumsfeld, but sometimes the upside of bubbles are among the "unknown unknowns."

That said, I talk in the book about the physical infrastructure that gets built in bubbles and the mental infrastructure that gets built. Both remain. By mental infrastructure, I mean the mindset of consumers--so we had this whole development of a cultural of re-financing, which proved enormously beneficial to the economy as a whole (people were able to save money on their mortgages repeatedly), and which won't go away.

_______________________

Bowie, Md.: To what extent are modern bubbles caused by the fact that transaction agents (stock brokers, real estate salespeople, mortgage brokers) are paid for each transaction, not according to how satisfied their customers are over long-term results? Does this skew the discussion of "is now a good time to buy" in favor of "it always is to the supposed professionals."

Daniel Gross: Absolutely. The whole culture of selling always affects the formation of bubbles. And real estate is the prime example of that. The whole chain -- the mortgage broker who got a fee for placing a loan, the real estate agent who got a commission for selling the house, the bank that got a fee for providing the cash for the loan, the investment bank that got a fee for securitizing the loan, the brokerage house that got a fee for trading the security, and the hedge fund manager who got a fee for managing those securities. Up and down the line, the whole thing was driven by fees. Nobody really cared if the loan made sense, or if the person could handle it or pay it back.

_______________________

Re: Housing boom: Also, people have been selling the properties on the coast and thus locking in the inflated gains and moving to more affordable places.

Daniel Gross: That's certainly true.

_______________________

Laurel, Md.: "Boston: Lets by fair to Greenspan and others who suggested adjustable-rate mortgages -- they are good because they are a one-sided bet, and you always can refinance if rates are rising. That is just simply true." But in America, fixed-rate mortgages are a one-sided bet that can always be re-financed if rates fall. The problem wasn't was Greenspan said, it was the timing -- he said it after rates had dropped as low as they realistically could and had nowhere to go but up.

Daniel Gross: Right on.

_______________________

Daniel Gross: Well, my time is up. Thanks to all who participated, and for your intelligent questions. I hope you'll all continue to read me in Slate, and will check out "Pop!"