Shouldn't a housing bust have the opposite effects of the housing boom? The party line about the economy is that the housing boom was a time of inefficient excess. Shouldn't a period of low housing investment bring efficient prodigality: that is, MORE GROWTH FOR GDP AND EMPLOYMENT and less growth for consumption? Why then does the party line feature gloomy predictions for real GDP and employment growth going forward? Make up your mind: was the housing boom efficient, or not? Do we want to relive those years, or not? If life after the housing boom is so bad, then let's not criticize the economic performance during those years.
There is some empirical support for the housing boom party line, and therefore data that calls into question the gloomy predictions for real GDP going forward. The chart below shows that real consumption [PCE] growth was somewhat greater during the housing boom than during the previous years. Real GDP growth and employment growth were less during the housing boom than during the previous years.
click to enlarge
A related contradiction in the party line is that it was unhealthy for there to be lending to people with bad credit scores. Now it's considered a problem that today (according to the party line) only people with good credit can obtain loans! Which is it: does a healthy economy provide subprime credit, or not?
Take Note: First estimates of GDP growth 2008 Q2-Q3 will be released later today. Obviously, one quarter does not make 7-10 year time frames like those that I studied above. Other than saying that employment will not fall below 134 million and that real GDP (chained 2000 dollars) will not fall below $11 trillion, I do not have any prediction about today's release (read the specifics of my predictions here).