When the facts change, I change my mind. What do you do? -- John Maynard Keynes

Monday, June 2, 2014

Government Policy, Tech Bubble, Housing Bubble, the Difference

FiveThirtyEight explains it at link below (excerpt follows):

Why the Housing Bubble Tanked the Economy And the Tech Bubble Didn’t | FiveThirtyEight: "... Despite seeing similar nominal dollar losses, the housing crash led to the Great Recession, while the dot-com crash led to a mild recession. Part of this difference can be seen in consumer spending. The housing crash killed retail spending, which collapsed 8 percent from 2007 to 2009, one of the largest two-year drops in recorded American history. The bursting of the tech bubble, on the other hand, had almost no effect at all; retail spending from 2000 to 2002 actually increased by 5 percent. What explains these different outcomes? In our forthcoming book, “House of Debt,” we argue that it was the distribution of losses that made the housing crash so much more severe than the dot-com crash. The sharp decline in home prices starting in 2007 concentrated losses on people with the least capacity to bear them, disproportionately affecting poor homeowners who then stopped spending. What about the tech crash? In 2001, stocks were held almost exclusively by the rich. The tech crash concentrated losses on the rich, but the rich had almost no debt and didn’t need to cut back their spending...." (read more at link above)

The unintended consequences of government policies encouraging consumers to borrow money at cheap interest rates to buy houses, flip houses, take out equity loans on houses, etc., led to the housing bubble that led to the crash. The problem is that unlike rich people, most people do not have the reserves to withstand such losses, hence, the Great Recession.

The government, directly and indirectly through housing policies, tax policies, Fannie Mae, the Federal Reserve, etc., had everything to do with the Housing Bubble and subsequent crash, but had very little to do with the Tech Bubble. Whenever government gets involved with the economy, it always ends badly.


The Big Picture

Financial Crisis - The Telegraph

JohnTheCrowd.com | The Sailing Website

Craig Newmark - craigconnects