Barney Frank’s disquisition on why you couldn’t have a housing bubble because “houses ain’t tulips” provides a remarkable insight into his thought process and its limitations. In a C-Span video Frank argued that overpriced housing was fundamentally different from historical bubbles, such as the one in tulips because houses had an intrinsic value which flowers did not.
I do want to address this thing about the bubble. I think the bubble is an entirely inappropriate metaphor. Let me just be very clear, houses ain’t tulips. Houses today even with the drop in housing prices are more valuable than tulips were however many years ago when we had the tulip business … bubbles in history haven’t been cases of irrational exuberance. They have been cases of exuberant irrationality. And there really is a distinction. Irrational exuberance means you get a little carried away with something that is basically a good thing. But exuberant irrationality is when you start thinking that tulips or some of those dumb ideas on the internet when there were some of those things that nobody in their right mind wanted to buy, those were excessive.
Considering that Frank was about to become the Financial Services Committee Chairman it was an extraordinary assertion. Economic bubbles happen every time there’s a disconnection between price and value at “high volumes”. It is the disconnection and the volumes involved which makes the bubble. Because the role of different commodities changes in history, bubbles are about different things, but are bubbles just the same. But it’s the price distortion that matters. Historically the worst bubbles arose from financial instruments, which Frank was supposed be on the lookout for. The argument that mortgages were not flowers was irrelevance bordering on intellectual dereliction.
From a speech he made in 2006, when housing prices were peaking:
As Glenn Reynolds says" "The country's in the very best of hands."
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