The “there was no bubble” reading list

The “normal” story of the Great Recession is that the crisis was caused by the bursting of a giant property market bubble in the US and other places. The normal story is an odd synthesis between a old-school Keynesian animal spirits story and a vulgar version of Austrian business cycle theory.

Market Montarists have long argued that the crisis was not a result of a bubble bursting, but rather a result of a monetary policy disorder – a unwarranted massive tightening of monetary conditions in both the US and the euro zone (and other places).

Market Monetarists, however, have paid less attention to whether or not there in fact was a bubble – and we do not necessarily agree on this. Scott Sumner and Marcus Nunes are quite critical that there was a bubble in the US property market, while David Beckworth and myself are more open to the idea that there might have been a bubble (whatever that is). Personally, I also focus on other countries than the US where I believe it is fairly obvious that there were substantial misallocation, which also manifested itself in a “bubble” in the property market. I certainly believe that that was the case in the Baltic States, Iceland and Spain. That said, that was not the cause of the crisis and therefore I would tend to downplay the importance of these “bubbles”.

Even though I believe that there might have been bubble in some countries prior to the crisis I am very critical about the normal story of widespread bubbles and that these bubbles were what caused the crisis.

In recent days there have been put out a number of blog posts that all seem to show that there was no bubble prior to the crisis. I think it is worthwhile reading all of these posts.

Here is the “there was no bubble” reading list:

We start out with Marcus Nunes post “Excuses Galore” from July last year on the US property market.

Marcus’ post has inspired Adam Smith Institute’s Sam Bowman to write a post on why “There was no British housing bubble”.

Sam has a follow-up post – “Bubble and a ballons”.

Finally you should read Harry Flam’s post on why there is no Swedish property market bubble.

Maybe I should write a post on why Danish property price indeed were (too) high prior to the crisis, but that it hardly was a bubble and the crash was not caused by a bubble bursting, but because of monetary tightening…but that will have to wait.

Leave a comment


  1. Interesting point about the Danish property prices not having been in a bubble – there is a strategiest who believes they were, and that there are also bubbles in Sweden and Norway. The IMF believes house prices there are overvalued. I am looking forward to reading your take on it! Meanwhile here’s what the strategist I’m talking about has to say:

  2. Obviously to say there was no bubble is very convenient to some models… I congratulate that you are open to the idea, in spite of whoch you say that “it was not the cause of the crisis”. It is difficult to me to assume that Fed was the only cause of it.
    On the other hand, perhaps the answer is behind the bubble, that is, in the huge leverage very similar to what we see in the thirties.

  3. Lawrence Kudlow

     /  January 18, 2014


    My friend Bob Mundell believes a massively over-valued dollar (ie, overly tight monetary policy) was proximate cause of financial freeze/meltdown.

    Larry Kudlow CNBC

  4. If by “bubble” people mean something other than asset price instability, then surely there has to be some predictability involved. But if asset price turning points were reliably predictable in the first place, we could not have “bubbles”. There is a deep definitional conundrum here.

  5. If by “bubble” people mean something other than asset price instability, then some sort of predictability should be involved, but if asset price turning points could be reliably predicted, we could not have “bubbles” in the first place. There is a deep definitional problem here.

  6. Benjamin Cole

     /  January 19, 2014

    There will ever be market corrections..but tightening money into a real estate correction will create a bust…

  1. The Casselian-Mundelian view: An overvalued dollar caused the Great Recession | The Market Monetarist
  2. A UK housing bubble? Sam Bowman doubts it | Spontaneous Finance

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