What do you define as 'real demand'? There are three main areas of demand for housing property:
1. People requiring shelter (i.e. people who will purchase a property to live in themselves) or
2. People purchasing property to extract rents (landlords) or
3. People purchasing property to later on-sell for a greater amount (property investors)
It's the third class of buyer that many believe is driving demand, and there's certainly a strong argument that the property investor class is bigger today because of depressed interest rates. Because of this increased demand, prices increase. But that price increase is driven only by the perceived future sale value of the property. This is why it's a bubble - The returns are predicated only on continued buy-in to the market. It's little more than a ponzi scheme.
This assertion falls apart if you don't accept the premise that current activity is being driven by investors, of course.
Also, investment however flawed is simply not the same as a ponzi scheme.
Fundamentaly however you have to realise that low interest rates are not artefical. If the natural interst rate were as high as in 2006 with the rates we observe now we would see a massive collapse of the money supply and a recession worse then the great depression. Interest rate in the hole world have been going down since 1970. A recession itself depresses real rates, because investment is simple not as profitable.
The idea that the central bank can indepentenly fix housing bubbles and create stable demand is just flawed, its simply not possible. Its the wrong tool for the thing you want to fix.
The central bank could simple start buying and selling property instead of bonds, but that just replaces stability in one market with instability in another.
I was responding specifically to your statement:
>Aditionally the idea that all these things are bubbles is quite suspect
I agree with your point that monetary policy may not the right place to solve a property bubble. I disagree only with the assertions that property bubbles might not currently exist and that bubbles can never be easily identified.
>Also, investment however flawed is simply not the same as a ponzi scheme.
It is if the return on your investment is solely dependent on the continued input of other people's investments.
>Fundamentaly however you have to realise that low interest rates are not artefical.
I am not arguing that they are. Are you confusing me with another poster?
>The idea that the central bank can indepentenly fix housing bubbles and create stable demand is just flawed, its simply not possible. Its the wrong tool for the thing you want to fix.
I agree.
If your meaning of 'bubble' is that at some unknown time in the future the price will be lower then it is now, then the concept is economically speaking useless.
> It is if the return on your investment is solely dependent on the continued input of other people's investments.
Still not the same thing. There is still a real asset that exists, it might change in price but it exists.
In a Ponzi scheme that is not the case, it falls apart if there is no further and nobody will have anything.
That is why you can go to prison for a Ponzi scheme but not for property speculation.
Which is why Central Banks don't make sense as independent arms of Government.
Bubbles are very very dangerous (as we all discovered in 2007/8) but they cannot be fought with interest rates alone. It takes a combination of government regulation, legal reform and government spending adjustments to bring bubbles under control before they infect the entire economy (which they will always inevitably do if left to fester).
By the way, calling people out for trying to stop the 1926-29 boom is a bit like blaming firefighters for fires getting out of control. The real mistakes were made after the bubble burst.
Just as after the great depression when everybody believed overspeculation on the stock market had been the problem. Economist have studied this for 70 years and the practically universal conclusion was that montary policy errors was the real problem.
In Australia montary policy did not fail and they did not experiance a recession, the have not had one since the early 1990s. Whatever housing prices might do.
Simularly the stock market crash of 1987 (just as big as the one in 1929) did not even cause a blip in GDP.
Montary policy might have caused a little boom between 1926-1929 but if you really believe that the reslution of that boom required the US economy to contract by 30% then you are totally misguided. The problem was a contractionary montary policy.
The same goes for 2008, montary policy was the problem. Its the same story, everybody blames bubbles and speculators but economist have increasingly rejected this view.
Your story of 1926-1929 is basically the Rothbardian story, even his the majority of his studends and others influenced by him have since rejected this story. Its an intellectually dead idea that refuses to die because it perfect for the political left to demand control over all markets. Exactly what you advocate.
An independend central bank focus on macro economic stability should only have one job, stability of nominal demand.
Outside of that we can have political debates about how much banks and markets must be controlled.
There's a direct line from Bear through AIG and Lehmans to the wider economy. Everyone was over-leveraged and GDP growth was predicated on the understanding that other people would keep on spending more. With house prices tanking that fantasy collapsed and everyone immediately started re-trenching. Cue recession. Any bubble large enough will always trigger a recession.
The government did everything it could to lessen the impact (sadly pretty much guaranteeing the next bubble will happen sooner and be larger in the process) but a recession was inevitable because people couldn't keep on spending money they din't have.
The Great Depression wouldn't have been as bad if economic stimulation had been applied earlier (although it may well turn out to have ended sooner, thanks to better targeted stimulation) but it couldn't have been avoided with better monetary policy. The boom relied on stocks continuing to climb exponentially. It was a ponzi scheme. And it burst.
Ultimately Central Bank policy is failing now because it doesn't have enough levers to restore balance to the economy. What lift we got in 2009 was from the automatic counter-cyclical kick of government spending that has largely petered out.
ps I didn't provide any story for 1926-29 boom so I have no idea what you're talking about there. You appear to be projecting.
There might have been a slight recession even if monetary policy was on point but its hard to see one sector declining so much that it shows up as a recession in macro data. In smaller less diversified economy that can happen easier.
> The government did everything it could to lessen the impact (sadly pretty much guaranteeing the next bubble will happen sooner and be larger in the process) but a recession was inevitable because people couldn't keep on spending money they din't have.
That is just false. If you look at the data you will see that nominal GDP was dropping like crazy in 2008 and even at the end of 2008 the central bank had not changed policy.
In fact they refused to change policy for so long that they literally ran out of (or at least went to low level that they did not want to go below) that they were forced into easing.
You can see this very clearly in the data during 2008.
When people talk about 'they did everything they could' they usually refer to stuff that started to happen well after that QE2 and QE3 for example. The big mistake was made in 2008 and early 2009, the later monetary policy action just insured that NGDP would not flatten out completely (as it did in Eurozone).
> The Great Depression wouldn't have been as bad if economic stimulation had been applied earlier (although it may well turn out to have ended sooner, thanks to better targeted stimulation) but it couldn't have been avoided with better monetary policy.
Australia practically avoid it. Sweden and Israel did way better in the early years and this was because of monetary policy. Australia keeped up NGDP growth and thus they did not suffer a recession.
> Ultimately Central Bank policy is failing now because it doesn't have enough levers to restore balance to the economy. What lift we got in 2009 was from the automatic counter-cyclical kick of government spending that has largely petered out.
A central bank is job is not to find some mythical balance. A central bank job is targeting demand and the Fed does a sort of OK job at it.
The argument that fiscal policy was the determining factor simply holds no water. Changing in government spending have absolutely no predictable impact on overall demand. The Fiscal Cliff of 2013 was the best example, everybody who believes in these fiscal theory were predicting disasters even writing a open letter signed by many economics. Their predictions proved to be absolutely wrong.
The magnitude of automatic stabilizers is simply not large enough to account for massive swings in the macro economy. If you however look at NGDP relative to trend line you will see that those swings are in fact large enough.
> ps I didn't provide any story for 1926-29 boom so I have no idea what you're talking about there. You appear to be projecting.
I implied that there was a unsustainable boom between 1926-29 and that the mistakes were made there. That is simply incorrect and basically no economist today who believes in that story as a large contributor to the Great Depression.
A central bank has to conduct montary policy for the economy as a hole. Attempts by central banks to 'clamp down' on bubbles have generally been catastrophic.
Also the low interest rates are simply not just 'artefically low' because of central banks. The montary effect of the interest a central bank sets is determained by the difference to the natural rate.
Propery bubbles or any other bubbles by themselfs don't relay cause much problems beyond the markets in question if montary policy stays on target.
Aditionally the idea that all these things are bubbles is quite suspect in a lot of places there is real demand for property.
Contracting montary policy in order to fight a property bubble would lead to the hole economy going into a recession.
The last time the 'fighting bubble theory' was really popular was in 1929. I'm not saying that was the only reason for the Great Depression, but its one of the major reasons.