In a column about how to deal with asset bubbles, Tim Duy says:
I am sympathetic with the view that interest rates were not necessarily too low during the build up of the housing bubble. Indeed, relatively low rates of investment (equipment and software) growth suggests that real rates were actually too high. But capital flowed to housing instead of more productive investment activities because that was the path of least resistance.
But why did capital fail to flow to productive investments? Saying that housing was the “path of least resistance” doesn’t explain anything. In some sense, housing (or property in general) has always been the path of least resistance for investment dollars.
The real difference seems to lie not in housing becoming a better target for investment, but in real goods and services becoming less attractive ones. Why? Surely this is something that deserves considerably greater scrutiny than it’s gotten. Why did investors no longer think that the returns from investing in the real world portion of the American economy looked very compelling? Why was demand for real world goods and services not high enough to provide ample investment opportunity? This seems like a core question of the past decade that hasn’t gotten enough attention.
