Just a few items (and the article has many more):
Markets are always right. Despite having experienced the world's biggest stock bubble followed by the world's biggest housing bubble in less than a decade, people still cling to this one. The mainstream view is that market prices reflect the combined knowledge of all market participants and so they must be correct. Whatever prices are, it follows that that some rationalization should be reverse-engineered to explain them. See Bernanke's laughable attempt to justify home prices in 2005 as an example. But history has proven time and time again, and is once again proving as we speak, that markets get it wrong all the time.
Debt doesn't matter. The economic boom we just went through was greatly dependent upon people borrowing against rising home prices to increase their consumption spending. Most people only looked at the economic growth side of the equation (such as GDP, or gross domestic product) without seeing that on the other side, our level of indebtedness to foreigners was growing faster than economic activity. This is neither sustainable nor desirable.
There is nothing wrong with borrowing if the proceeds are used to increase future productive capacity by building up infrastructure or the means of production, because these expenditures will lead to an increase in our economic potential and earning power down the road. But when the proceeds are used to buy consumer goods that have no productive capacity -- and houses are consumer goods, by the way -- that increases the debt we will have to eventually pay without a commensurate increase in our future earning power. This is bad.
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A rise in home prices is the same as saving. During the boom we constantly heard that it didn't matter that Americans spent more than they earned. Their home prices were going up, we were told, so the country was getting wealthier. This reasoning is very flawed.
An individual who owns a home that goes up in price can indeed become wealthier if he sells the house. But in that case, the person to whom he sells has to come up with the money to buy the house. There is no increase in overall wealth -- just a transfer of wealth from buyer to seller. If on the other hand the owner keeps the house and takes out some equity, he has to borrow money from someone else in order to do so. Again, there is no net increase in wealth -- just a temporary transfer of money from lender to borrower.
Saving is the act of foregoing current consumption in order to use your capital (money, in this case) at a future date. From an overall standpoint, rising home prices (or any asset prices, for that matter) do not lead to any increase in society's accumulation of saved capital.
High asset prices are good for the economy. Over the long haul, society's prosperity is dependent largely on how effectively it utilizes its resources, including its people, its natural resources, its existing means of production, and its saved money. The purpose of the investment markets is to foster the most efficient allocation of saved money. To this end, neither high asset (specifically stock and bond) prices nor low asset prices are desirable.
When asset prices are too high, it is too easy for businesses to gain access to capital (again, money) and many inefficient business ventures will be funded, thus wasting society's resources. Good examples of this phenomenon from recent times include the free-spending yet profitless dot-com companies during the tech stock bubble and the glut of McMansions in the Inland Empire more recently. In both cases, society's resources were squandered because asset prices were too high.
If asset prices are too low, on the other hand, it is hard even for viable businesses to gain access to capital. Society's resources will not be used to their full potential. It's tougher to find recent examples of this phenomenon, given that so much money was until recently chasing financial assets, but it certainly has happened in times past.
If asset prices are too low, it's better for them to go higher. Everyone can probably agree to that. But if asset prices are too high, such that they are encouraging a wasteful use of resources, it's better for society's long-term prosperity that they go lower. A big part of the current (and future, I surmise) bailouts entails propping up asset prices. This is bad for the economy in the long haul.
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