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The Housing Bubble vs. the Financial Crisis
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In the mid-2000s many regular folks knew that something was weird in housing. Of course everyone was aware that there was a short term windfall to be made if you could flip. But there were normal discussions about the bubble, and when it would burst, or if the weird arguments by some economists and the real estate industry that there wasn’t a bubble were true. In contrast regular people weren’t aware of the possibility of a financial crisis. I recall saying stupid things about the “Great Moderation,” parroting what I’d heard smarter people who I assumed knew better say, in the summer of 2008. Or take a look at some of the comments when I mooted the possibility of a recession in mid-2007: “They’re practically glorified hiccups nowadays. I don’t get what the big deal is.”

With that in mind I looked at Google Trends for two queries, “housing bubble” and “financial crisis.” The top panel is search query, and the bottom panel is news query. The financial crisis query is what you’d expect:

The housing bubble query is more interesting:

People were searching for the “housing bubble” query probably because it wasn’t saturating the media. Once it was they had no reason to search, it was confirmed as a bubble. I vaguely recall similar issues in late 1999 and early 2000. Before the “internet bubble” burst we were all talking about it. Once it burst it was kind of depressing and we didn’t want to talk about it, but the news wouldn’t stop covering it.

(Republished from Discover/GNXP by permission of author or representative)
• Category: Economics, Science • Tags: Google Trends 
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  1. yeah, it aggravates me when I hear some folks say “no one could see this financial crisis coming” when in fact several economists and financial gurus talked about it in advance repeatedly… but they were a minority saying things people didn’t want to hear (even though their logic was pretty impeccable). Anytime you hear prognosticators
    (salespeople?) saying that ‘times have changed,’ the old metrics or standards no longer apply, and a new booming economy will just keep rolling along forever and evuh… sell your stocks and hunker down!

  2. Anonymous • Disclaimer says:

    When I moved from the Deep South to the DC metro 6 years ago, I was astounded at what I perceived as a mania in housing. People talked with pride about the value of their homes. I refused to buy because I knew something was grossly wrong. Average wage earners were living in what I believed were dumps that they had financed at .5M or more. A local economis guru at a major university fueled the delusion with predictions that the average DC area home would be valued at $5M within 4 years. It took everything for me not to burst out laughing in front of educated people who salivated this garbage. No way could this be perpetuated. It was so obvious and yet I could find few people who could see it.

    Luckily I rented and still do. My estimation of people’s ability to see the implications of a highly flawed process was lowered to negative numbers. Sad. It will happen again. There are more chumps out there than anyone can imagine.

  3. It wasn’t just stupid people who poo-pooed the idea of recessions. That was the dominant economic theory — “The Great Moderation”.

    There were economists and others who saw trouble coming, but they were a minority, and the economists who did see trouble weren’t at the top of the profession. (They still aren’t. There’s been no real shakeup. Economists are ranked on the basis of sophisticated work, regardless of whether or not the work applies to reality. The people who helped screw things up so badly still feel that they’re right about everything).

    Many people started getting antsy 2 or 3 years before the crash, but they didn’t talk too loud because they didn’t want to be the one to pop the bubble. Once there’s a bubble there’s no painless way out, and it’s almost impossible to make money by timing when a bubble’s going to pop: “The market can stay irrational longer than you can stay solvent”. If you bet against a bubble too early, you lose big time.

  4. Taleb got it right. He’s now a collaborator of Prof. Daniel Kahneman, Nobel Laureate at Princeton ( It’s true that Taleb isn’t “formally” considered an economist, but his work has become more influential. Likewise, Prof Robert Shiller, ranked in the top 100 economists, predicted the housing bubble.

    Admittedly, these accurate predictions were few and far between. Most quants on Wall Street also got these predictions completely wrong, so incompetence was widely distributed within top PhDs of physics and math programs who populate Wall Street firms.

  5. Equally as amazing is how people in power insist that the solution is to do whatever it takes to keep home prices as high as possible.

  6. Speaking of hierarchy, wouldn’t it be nice if the people running the show knew that the hell they were doing? I can think of cases in the past in which they kinda-sorta did, but the world didn’t change as fast then.

    Of course their interests and mine are not the same, so I wouldn’t like a lot of their actions even if they were competent – but it’s hard having to knuckle your forehead to a proven fool.

  7. Eric Falkenstein thinks Shiller hedged his claims too much to be credited with calling the crash.

    I think I’ve linked to it before, but these folks claim the Great Moderation and its reduced volatility is still ongoing.

  8. @TGGP: I think Eichengreen’s papers are among the best:

  9. The consensus was not completely ignorant, just wrong. From 2006 onward, macroeconomists were building into their forecasts the assumption that housing prices would tumble and this would cut demand and growth due to the perceived reduction in wealth. Many were also assuming large write-downs in bank assets. What they did not pick up was how close the banking system was to insolvency or at least illiquidity. The bankers did not know that themselves. They knew they had overvalued assets, had tried to cover them and thought (wished) they had. They came close, as indicated by the payback of most of the bailout money given to the investment bank. But close was not enough.

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