Toro
Diamond Member
That doesn't fit with the fact that it's labour which is far out of line with everything else. If that story were true, and the cause were a misallocation of capital, it would be investment which shows up as being far out of line with other variables, like it does in most business cycles. A misallocation of capital story doesn't make any sense for this recession.
Sure it does. According to some estimates, something like 40% of all the jobs created in the 00s before the crisis were directly or indirectly related to the housing or the mortgage market. Without the housing bubble, those jobs would not have been created.
Too much capital went into the telecomy in the 90s. To counter the depression in the teleconomy, a bubble was created in the housing market, and we built too many homes. The normalized run rate of homes is about 1.1 million units a year. We were building 2 million in the mid-00s, which was unsustainable. This is a problem of mal-investment and too much supply, not a problem of insufficient demand.
How are they creating "excesses" at all?
By mis-pricing credit.
Nature of what problem? The nature of the problem in financial markets? Maybe that's true. But the problem economists are looking at isn't regarding the valuation of assets, because that's not economics; that's finance. The problem economists are looking at is "how does this affect macroeconomic variables". How does a financial crisis result in a retail worker being long term unemployed 5 years later? Since it's a financial crisis, the obvious answer is to go to a story about financial intermediation and the allocation of capital. Except those stories don't jive with the data. It's a case of post hoc ergo propter hoc; there was a financial crisis, we are in a slump, people assume that A caused B.
A is the primary cause B if you see the relationship between B, C and D.
Finance is a branch of economics.
The nature of the problem is excess supply and mal-investment due to the mis-pricing of credit.
Most economists do not understand the effects of valuation on markets and the aftermath of the mis-pricing of assets. This is a big problem. This is why Ben Bernanke can testify at Humphrey-Hawkins in 2006 and dumbfoundingly say that off the charts housing prices reflect a strong economy, or why Greenspan can wonder if tech stocks really were a bubble, as he did in 98 and 99. That our top economists cannot identify asset bubbles is stunning to me. I've spent 20 years in financial markets, and I have found that most economists are generally clueless about how markets and real economy works, at least at the extremes.