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The bright side

Posted by: Michael Mandel on August 13

I’ve spent a lot of time thinking about the events of the past couple of weeks, and deciding whether I should reassess my view of the credit market. The short answer—I still stand behind this commentary . The mortgage markets are going to be bombed out for quite a while, but I don’t see any reason for a long-lasting impact on the rest of the credit markets.

In fact, back in 2005 I wrote a series of posts and commentaries arguing that the end of the housing bubble could free up capital and real resources for other types of investment, including tech and telecom.

The Real Cost of the Housing Bubble
Housing versus Business Investment
Housing vs Tech
The Cost Of All Those McMansions

Here’s what I wrote in the McMansions piece (published June 2005):

What happens when the housing boom finally slows? The share of GDP going into housing construction will fall sharply, hurting construction workers, architects, and homebuilders. Homeowners will no longer be able to draw on rising home equity. And what about Americans who borrowed heavily to buy properties for investment, expecting prices to keep climbing? Much like the companies who built miles of now-unused fiber-optic cable during the 1990s, they will be in deep trouble.

Yet even if there are temporary disruptions, the end of the housing boom may be good news for the overall economy. The U.S. doesn’t need to drive growth with ornate new homes and elaborate kitchens with expensive marble counters. Instead, a shift away from housing could free up hundreds of billions of dollars for other, more productive investments

I still believe this today. It’s a mortgage and housing crunch, not a credit and business investment crunch. I’m going to bet that the rate of tech and telecom investment actually accelerates over the next year.

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Reader Comments


August 13, 2007 01:30 PM

I would distinguish between credit and business investment based on low rates, low risk premia, and leverage, and those based on productivity and innovation. The former face the same obstacles as mortgage and housing. The latter, while useful, will be limited by slow growth.


August 14, 2007 07:16 PM

Michael, your economic commentary is always refreshing and thought provoking. In other words, I may not agree, but you have provided a different way of looking at a situation. The question here is whether the US housing boom was diverting investment from wealth creating productive activities to wealth destructive consumption activities. My impression is that US corporations have accumulated large amounts of cash during the 2000's, a time of unusually low interest rates by historical standards. Since corporations should invest in expanding productive capacity if the return on that investment is greater than that from a riskless investment, the fact that they have not done so over the past few years suggests that investment returns have in general been too low to induce corporations to invest. Thus, on its face, there is no particular reason for investment to increase because of the housing crunch.

On the other hand, I would expect investment in telecomm investment to increase in the US regardless of the state of the economy. The broadband penetration rate in the US is relatively low and catching up with countries like Japan and Korea should result in increased investment. However, the housing crunch won't "free up" capital for such investment.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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