Must All Bubbles Burst?

Dolors & Sense

by Sanford Rose 

KISSIMMEE Florida—(Weekly Hubris)—11/7/11—Not necessarily. The economic bubble of housing investment burst in 2006, but it needn’t have.

The bubble started inflating after the stock market collapse of 2000-2001. Investors, domestic and especially foreign, eschewing the risky stock market, put their funds into bonds, most particularly the new triple-A-rated mortgage bonds. This was allegedly a flight to safety and quality.

The funding for their output secured, builders built as they had never built before. More houses got built than new households were formed. Many more.

Emboldened by “creative” financing, investors and flippers crowded into the market, while brokers inveigled the unwary into accepting unsustainable obligations. Home prices shot up. (Actually, they started rising in real terms in 1997, but nothing like the post-2003 advance.)

Bubble-land. It seems it had to burst.

But stating the problem also states the solution: speed up household formation.

How? Import the households. Drop the barriers to immigration.

Not many people want to immigrate to the US today. But a whole lot more did in 2005-2006. And their coming would have helped save the economy by, of course, helping to correct the imbalance between the mushrooming housing supply and the need for that supply.

Prices would still have fallen because of the gap between swollen inventories and bona-fide, as opposed to speculative, demand. But, if the regulators had begun policing loan underwriting standards, which was their sworn but neglected duty, new immigrant householders would have received more affordable mortgages, and nothing like the self-reinforcing downward spiral of prices we have witnessed since 2006 and will probably continue to witness until 2015 would have occurred.

Immigrants, who have sustained America from its foundation, could have spared it the worst recession in 70 years.

Attitudes toward immigrants fluctuate with the economic cycle. In good times we love them; in times like now, we hate them.

And we invent economic facts to support our fluctuating attitudes.

Today it is routinely argued that immigrants drive down the wages of workers.

Poppycock. Most reputable studies suggest that immigrants have relatively little net impact on wage levels. The wages of less-skilled workers have indeed been falling in inflation-adjusted terms for decades, but that is largely because of rising globalization, enfeebled unions and technological change, not immigration.(To be sure, globalization is itself tied to immigration, but mostly the immigration of Chinese and Indian workers from rural to urban areas in their own countries.)

It is also argued that immigrants are a drain on the public purse.

Also poppycock. Again, the respected studies find that immigrants pay more in taxes than they siphon off in public and welfare services.

The scholarly consensus on immigration is similar to that on free trade: although there are winners and losers, on net, the economic impacts to the country as a whole are strongly positive.

But never so positive as they would have been in 2006. Had we flung open the Golden Door then, the housing bubble would have deflated but not burst.

But it did burst. And with it, the bubble that is America—inflated by hope and kindness, as well as, of course, a measure of froth and kitsch—is also in the process of bursting.