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Comment by watchandwait | Hacker News Reader

Both systems have a constant: massive government subsidies that distort the true supply, demand, and economic ROI for the good. There could not have been a housing bubble without Fannie and Freddie, the FHA, and the protected-by-regulation class of bond ratings agencies.

Similarly, there would not be an education bubble without federal loan guarantees -- certainly they have escalated cost of college, and most of the shady for-profit colleges thrive on student subsidies.

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Sorry, bubbles happen even without government action. Read up on the tulip bubble for a classic one. http://en.wikipedia.org/wiki/Tulip_mania

There is also plenty of blame to spread around. EX: Irish http://en.wikipedia.org/wiki/Irish_property_bubble burst 2008. UK http://en.wikipedia.org/wiki/British_property_bubble burst 2008. Australian http://en.wikipedia.org/wiki/Australian_property_bubble (yet to burst) etc.

What is really interesting is how little the price could increase before market forces brought things back to reality. Housing is such a large percentage of the worlds wealth that we never saw the sort crazy multiples over value that other bubbles get to. EX: http://en.wikipedia.org/wiki/Japanese_asset_price_bubble

Bubbles require rapid credit expansion. There may be varied reasons for what fuels a particular bubble, but the necessary precondition is easy money/credit.

When the government regulates the currency & credit markets tightly, then government should share in the responsibility for the bubble.

The largest and least stable bubbles are often driven by credit but there is a wide range of causes. For example, one of the largest and less talked about bubbles comes from the shift from defined benefit plains to 401k style investing. In the mid-1980s there were fewer than 8 million participants with less than $100 billion of assets in 401(k) plans.[3] By 2006 there were seventy million participants with more than $3 trillion of assets in 401(k) plans. Now, what happens to the US stock market as baby boomers retire and there is a significant shift between people buying and selling stocks?

PS: Many bubbles are simply money looking for somewhere to hide. Assume the US cut it's military budget by 80% and paid of the debt in 20 years, where do you think that money would end up?

I'd recommend looking at a chart of GDP from before the Fed was established for the express purpose of mitigating boom/bust cycles.

It looks like a jigsaw. If you look at a chart of actual numbers, it's pretty clear that the countercyclical tools available to the fed diminish the effect of bubbles.

"There could not have been a housing bubble without Fannie and Freddie, the FHA, and the protected-by-regulation class of bond ratings agencies."

I beg to differ. You could have pulled the full cost of every defaulted mortgage out of the bottom line of a single big-5 investment bank and not even bankrupted it. But we had all these crazy hyper-leveraged instruments that turned a 50 billion dollar problem into a 5 trillion dollar problem. The issue wasn't the mortgages, it was the leverage and gambling.

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