Noah Smith writes:
I definitely think financial markets are unstable, and that bubbles are the biggest and most damaging manifestation of that instability. And the experimental evidence certainly suggests that more liquidity sloshing around in a market can give rise to bubbles, just as Austrians and Post-Keynesians believe.
But then again, I don't see a lot of anecdotal indication that QE is creating Housing Bubble, The Sequel. I agree with Robert Shiller that bubbles are characterized by optimistic expectations and general excitement. I don't see a lot of excitement about eternally-rising asset prices or a New Economy or a "This time is different" mentality.
There are plenty of forces out there in the housing market who promote a psychology that people had better get in before mortgage rates rise more and also to not miss out on rising prices. Also, there's an almost insider argument as to what does or doesn't constitute a bubble or bubbles within housing and real estate in general.
Trulia and Zillow's chief economists, Jed Kolko and Stan Humphries respectively, have an unspoken contest going on over the "bubble/bubbles" issue. Jed says there are no real bubbles and that any are far off. Stan leans more to seeing the building of any bubbles as sort of bubbles in themselves, a view we share. That doesn't do full service to Stan Humphries' nuanced positions on the subject though.
Our view is that while Noah is correct that bubbles are, among other things, psychological, there is a psychology of bubbles out there already and has been ever since the huge all-cash ROE-to-Rental buyers forced the market to turn the corner and mass media caught on and Realtors started up again with a vengeance.