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Bubble economy?

By: 10 August 2011 No Comment


Federal Reserve Bank of St. Louis President James Bullard said he expects to see the national economy improve through the second half of the year.

While it’s not terribly unusual to see some economists and government officials to call for improved economic health regardless of how things are going, Bullard had a unique take on the national economy. He said one can, in essence, think to the economic strife that has plagued the nation these past couple of years as being created by a “bubble economy” that deviated substantially from the “fundamental economy.”

In short, the fundamental economy – the one that forms the bedrock of our national financial health – grows steadily at the annual rate of 1.75 percent of our gross domestic product (GDP). When you have an economy that grows faster than that rate, then you’re looking at a bubble that will eventually burst, dragging the nation through a time when the GDP is growing at less than 1.75 percent.

When the economy falls below that fundamental growth rate, then, you’ve got a situation that is all too familiar these days – high unemployment, shaky consumer confidence and all those other things associated with a recession or depression. He said we’ve seen that cycle repeat time and time again in the U.S., leaving the country to struggle through some hard times before the economy returns to the fundamental growth rate.

Bullard said the national economy most certainly went through a bubble economy, partially led by overinvestment in the housing industry. From 2001 through 2007, he said the average GDP growth was 2.4 percent, which is well ahead of what he defines as the fundamental growth rate of 1.75 percent.

That 2.4 percent growth rate led to an economic boom, of course, as jobs were created directly in the housing sector and in industries that supported it. The downside of all that growth is that bubble economies, Bullard said, do burst. The U.S. economy was hit hard in late 2008 and early 2009 and jobs were lost in the housing sector and related industries. That shockwave was felt, he said, through the economy as a whole as GDP grew at a rate lower than 1.75 percent and has been struggling to get back to that level sense.

The bursting bubble, in other words, caused the national economy to not only lose the job and growth rates it absorbed between 2001 and 2007, but put us at a level that was behind what we’d consider normal.

The good news from all of this is that Bullard believes we are very close to the 1.75 percent, fundamental GDP growth rate that is the hallmark of a stable economy.

One other thing Bullard mentioned of note had to do with sustainability. That growth in housing was great for awhile, but it boomed at a rate that was unsustainable. We hear the word “sustainable” thrown around a lot these days and there’s a reason for that – when you’re on the negative side of a bubble, a sustainable growth rate looks good, indeed.

Is the solution to avoiding bubbles, then, aiming through sustainability? When Congress and federal regulators talk about reducing the risk lenders take on when writing mortgages, discouraging “exotic” loans for houses that buyers may not be able to afford when their introductory terms wear off, etc., it does appear that sustainability is a major goal.

While it seems obvious that a perfectly sustainable economy that will never go through even limited “boom and bust” cycles is an almost unreachable goal, the federal government appears to be making an attempt to take us there. Will the reforms we’ve seen from Washington and the ones that are due in the future get us close to that goal?

Only time will tell.

Home Sweet Home is written by Ethan C. Nobles and is sent weekly to publications throughout the Natural State on behalf of the Mortgage Bankers Association of Arkansas.

About: Ethan C. Nobles:
Benton resident. Rogue journalist. Recovering attorney. Email =

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