WHAT IF THERE HAD BEEN NO HOUSING BUBBLE?

James Surowiecki does a nice job making a point I've been hearing occasionally. Most bubbles leave the country with something of worth. The tech bubble, say, gave the country the tech sector. The initial enthusiasm leaves the country with a bit of a hangover, but you've still got a pocket of phone numbers from the night before. It was worth it. This is all very predictable in mathematical simulations: Economic changes almost always produce bubbles. The weird thing about the housing bubble is that it was effectively worthless. Surowiecki explains:

There have been three big banking booms in modern U.S. history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J. P. Morgan funded the creation of industrial giants like U.S. Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution. Each wave, Philippon shows, was propelled by the need to fund new businesses, and each left finance significantly bigger than before. In all these cases, it wasn’t so much that the bankers had changed; the world had.

The same can’t be said, though, of the boom of the past decade. The housing bubble was unique, and uniquely awful. Each of the previous waves had come in response to a profound shift in the real economy. With the housing bubble, by contrast, there was no meaningful development in the real economy that could explain why homes were suddenly so much more attractive or valuable. The only thing that had changed, really, was that banks were flinging cheap money at would-be homeowners, essentially conjuring up profits out of nowhere. And while previous booms (at least, those of the twenties and the nineties) did end in tears, along the way they made the economy more productive and more innovative in a lasting way. That’s not true of the past decade. Banking grew bigger and more profitable. But all we got in exchange was acres of empty houses in Phoenix.

My understanding of the going theory here -- and it is, admittedly, a bit choppy -- is that the housing bubble emerged somewhat differently than most bubbles. It's not that we found a new sector to lavish with money and just got overexcited. It's that we had too much money -- that "global glut" you sometimes hear about, or the "giant pool of money" that This American Life famously tracked -- and had to find a way to spend it. The housing bubble was a bad solution to a problem of excess money, in other words. But if we hadn't bubbled up the housing sector, we would have inflated something else.

But I'd like to phrase the question differently. Given the glut of money that ended up in American banks (more on that here), what would have been the best-case scenario for our economy? Obviously the housing bubble wouldn't have been it. But was there a best-case scenario? Or were we simply letting so much currency dock on our shores that some sort of bubble-ish outcome was effectively inevitable?

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