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Kindleberger’s Last Bubble

Paper Economy:

Paper Economy - A US Real Estate Bubble Blog: Charles P. Kindleberger... appears to have spent his final days clipping out newspaper articles in order to corroborate his intuition of a mounting real estate bubble.... The following is an excerpt from an interview with the Wall Street Journal published less than a year prior to Kindleberger death in July of 2003:

The object of his greatest fascination today is the real-estate market. For weeks, Mr. Kindleberger has been cutting out newspaper clippings that hint at a bubble in the housing market, most notably on the West Coast. Nationwide, median home prices are up about 7% from a year ago, even though the stock market has tanked and the economy has floundered. Over the long term, economists agree, housing prices can't continue to outpace growth in household incomes. Mr. Kindleberger says he isn't certain there is a housing bubble yet, "but I suspect it is."

The trick with spotting real-estate bubbles, he says, is that they don't always spread. In 1925, for instance, real-estate prices in Florida soared and crashed, but that didn't spread to the rest of the country. Yet he notes that something is distinctly different about the nation's housing market today, when compared with 1925. Fannie Mae and Freddie Mac, two large government-sponsored enterprises, own or guarantee nearly $3 trillion in mortgages, helping to keep the mortgage market liquid with cash. That is a boon to homeowners, but Mr. Kindleberger says he fears that Fannie Mae and Freddie Mac's deep nationwide presence in the market is fueling a speculative fire.

"Banks will make a mortgage and sell it to them. It means that the banks are ready to mortgage more and more and more and more. It's dangerous, I think," he says.

A Fannie Mae spokeswoman describes the argument as "preposterous," and notes Mr. Greenspan dismissed the chances of a housing bubble in testimony to Congress last week...

Of course, our problems arose not because banks made mortgages and sold them to Fannie Mae and Freddie Mac--that would have caused a problem, but it would have caused a different problem than the one we have.

Our problem is that the banks made mortgages and did not sell them to Fannie Mae and Freddie Mac.