Bubblicious

What is the functional difference between an interest rate bubble and a housing bubble?

I say this because Brad DeLong says its more likely that we're in the former and not the latter. More specifically, that the rise in housing prices is a rational response to a too-low interest rate. Arnold Kling agrees[1].

But, from an Austrian perspective, what's the difference? A credit-induced bubble is induced due to an artificially low interest rate. So I suppose one is calling the bubble what it is (identifying the root cause) vs. identifying an effect of the credit bubble.


fn1. At least, that there is no housing bubble.

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Brian, "...More

Brian,

"...More specifically, that the rise in housing prices is a rational response to a too-low interest rate..."

The interest rate is likely to be fairly well correlated to the discount rate that would be used to find the net present value of future goods. Since housing purchases are largely future goods, as opposed to rent, for example, lower interest (and discount) rates will result in higher present market values. This will normally apply to most durable goods and stocks, as well.

"But, from an Austrian perspective, what?s the difference? A credit-induced bubble is induced due to an artificially low interest rate. So I suppose one is calling the bubble what it is (identifying the root cause) vs. identifying an effect of the credit bubble."

I suspect, but do not know, that the order of causation is an expanded supply of credit, resulting in a lower rate of interest attached to bank loans. Then, the FED may have to drop the FED funds rate to allow the banks to enjoy a profitable spread of rates so that they actually make loans.

Regards, Don