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.