The massive credit expansion that Austrians have been calling attention to since the mid-90s has morphed from a stock market bubble into a housing bubble. Whether there was, or was not, a stock market bubble was much disputed among mainstream media analysts until fairly late into the stock bear market. Now the existence (or not) of a housing bubble is similarly controversial. Slowly the mainstream media is starting to question, is there a credit bubble?
Jim Puplava has been one of the most oustpoken critics of the bubble economy on his Austrian web site, Financial Sense. In this hour-long radio show, Puplava states that, barring an exogenous event that causes interest rates to spike, the housing bubble will run for 2-3 years before collapsing under its own weight because most of the adjustable-rate mortgages with low teaser rates will start to reset in 2007-2008. (See also Puplava's essay on Tipping Points.)
Austrian analyst Peter Eavis writes that the credit bubble will collapse in 2006.
Another long-time critic, Zeal LLC presents an exccellent three-part series on the housing bubble (part 1, part 2, part3). Contrary Investor dissects the fall in household cash and liquid assets to all-time lows, while household debt and therefore leverage is at all-time highs.
A very simple question might be, what happens to household asset values (implicitly net worth) if households slow their acceleration of leverage? Will the baby boomers simply continue borrowing until planted six feet under? The demographic rationales of folks like Dent that theoretically explain real world economic phenomenon are implicitly crying out this question.
See also: As Prices Rise, Homeowners Go Deep in Debt to Buy Real Estate (paid site - $)
Marc Faber, who has precisely identified the problem from the begining, ruminates on the decline of US savings and the run-up in housing prices in When a House is Not a Home.
Slowly, the mainstream media is starting to dip their toe into the subject. The San Francisco Chroncle reports Housing, hedge funds spur bubble worries: Some experts fear low interest rates may have pumped too much cash into global markets
Philp Coggan in the Financial Times sounds very Austrian:Trapped inside a bubble of ever increasing credit (paid site - $)
Cooper looks at the relationship between risk premia (the excess return that investors demand for risking their capital) and asset prices. If confidence improves, risk premia will fall. In other words, investors will apply a lower discount rate to future cashflows. This will encourage them to invest in more marginal projects, ones that would not be profitable if they applied a higher discount rate. Indeed investors will be willing to borrow money to invest in these risky projects, provided the expected returns are higher than the cost of borrowing. Their leverage will increase. But a lower risk premium means the value of their existing assets will rise. That will bring down the investors' leverage, making them even more confident and encouraging them to borrow even more. A virtuous circle sets in.
