Anyone can justify just about anything by framing a discussion in a way that focuses on their points without taking the context into which their points fit into consideration; and the housing bubble is certainly no exception. Even well intentioned and very intellectually talented people can get caught up in monolithic thinking and come out with some peculiar results.
Let’s just suppose that some government policy resulted in a higher demand for housing and related investment. And that policy subsequently resulted in a shift in investment and spending away from other sectors of the economy, and some increase in interest rates from the banks being complicit in all of it instead of making everyone who wished to cash in while the cashing in is good pay cash.
How could that reasonably be called a credit fueled bubble? It’s not a credit fueled bubble. Credit is universal and causes no harm by simply being there.
The fuel for the” bubble” AND the related credit and securities markets is the policy that causes the excess demand for a specific investment that sucks the oxygen out of the rest of economy while also preventing market interest rate adjustments from having a clearing effect for the select investment – among other things. You know, Fannie and Freddie had implicit guarantees and could sell bonds with almost no limit.
Saying that credit fueled the housing bubble, therefore credit is the problem is like saying evil people with guns kill people, therefore guns are the problem. Guns are inanimate objects. They are neither bad nor good. Credit is an abstract object, neither bad nor good. Both are good to have under the right circumstances and bad in others. We cannot cure the evils of society by using government to rid us of guns, nor can we cure them by using government to limit credit. In both cases, the result would be that unsavory people who should not have one or the other will have them while honest people who find themselves in need of one or the other will not have them; and we will still have evil people killing people and government policies inflating huge “bubbles” with a rather perverse constituency cashing in.
And just when you thought I might be done, I come to the issue of the explanation of what happens when the “foolish investors” who have been unbalanced by the lack of conservative investors get tired of being taken for a ride by the “foolish speculators” and stop buying houses. Oh, that is when the bottom starts to fall out of the housing market, the bubble bursts and the economy goes to the deep hot place. Um… Not so fast.
What do the “foolish investors” do with their money if they are not buying houses? Do they dig a hole in the yard and bury it? Well, perhaps if they think that there is no other safe place to invest, they cash out and buy gold, then bury that in the basement.
But what would give them the impression that there is no other thing to do with their money or equivalents but bury them in the basement? And what happened to our balancing friends, the conservative investors? Have they already buried their wealth in the basement?
I think that before we can take the leap in logic from the bottom falling out of the housing market to the economy going to the deep hot place, we need to fill in that gap to explain why people might not just shift their “foolish investing” habits to some other thing besides housing. Any explanation of how we get from the housing crash to the economy doing into the dumpster in a general way that does not fill in the gap is intellectually dishonest.