By exploiting a record credit bubble to borrow against an unprecedented property bubble, American consumers spent well beyond their means for many years.

In addition to the downturn in real estate, a broader bubble in consumer credit is now collapsing as the US economy slips into recession, defaults on credit cards, auto loans, and student loans will increase sharply.

When both bubbles burst first housing, and then credit asset dependent US consumers were exposed to the American strain of the Japanese disease first diagnosed by Nomura economist Richard Koo.

Following the credit bubble burst in 2008, fiscal transfers replaced these private financial flows, causing budget deficits to balloon.

The Fed has been trying to slow demand growth and cool the housing price bubble to avoid inflation, but carry trade speculators have been easing credit.

Those who borrowed recklessly during China s credit boom are not small private firms or average consumers (household indebtedness in China is very low), but local governments, SOEs, and well connected real estate developers (many of them family members of government officials).

What was stunning was how the Fed, under Greenspan s leadership, stood by as the credit boom gathered steam, barreling toward a subsequent crash.

The just collapsed credit bubble, fueled by so called special investment vehicles, derivatives, collateralized debt obligations, and phony triple A ratings, was built on the illusions of mathematical modeling.

By levying a tax on consumption at each stage of the production chain, America could reduce the overconsumption that helped feed the recent credit bubble, encouraging savings and investment instead.

The crisis was caused by the largest leveraged asset bubble and credit bubble in history.

And to do that it needs to create a housing bubble to replace the Nasdaq bubble.

America s Education Bubble

Israel s Election in a Bubble

The Gold Bubble and the Gold Bugs

France s basic problem, like that of the countries most affected by the crisis, is that the wave of cheap credit that the euro s introduction made possible fueled an inflationary bubble that robbed it of its competitiveness.

Credit Where Credit is Due

Frei Otto was starting to use foam bubble diagrams and foam bubble models to generate his Mannheim Concert Hall.

So we live on the most fragile, little soap bubble you can imagine, a very sacred soap bubble, but one that is very, very easy to affect.

Unlearned Lessons from the Housing Bubble

They had no compunction about calling a bubble a bubble, or in intervening to deflate it.

Maybe the word bubble is used too carelessly.

So in a sense, the Chinese bubble as much an intellectual and political bubble as an economic one has burst.

His reappearance comes just as the credit bubble fueled by the sub prime mortgage boom is about to burst, triggering the worst financial and economic crisis since the Great Depression.

For several years, I argued that America s economy was being supported by a housing bubble that had replaced the stock market bubble of the 1990 s.

So there are striking similarities, I think, to the Internet boom, right?

The Internet bubble was unusual in this regard.

Rural Credit

Credit

Greenspan stoked two bubbles the Internet bubble of 1998 2001 and the subsequent housing bubble that is now bursting.

Banks and credit card companies have become much more cautious about extending credit.

The supply of credit, in other words, resulted from the demand for credit.

Credit histories cannot be shared, because a credit bureau is just getting started.

Credit risk is best hedged through diversification across uncorrelated credits.

During the housing bubble, prices signaled a severe scarcity of houses.

On top of these two powerful fundamental factors sits a bubble.

But this agency never even acknowledged that there was a housing bubble.

In the fourth act, the real estate bubble will burst.

Credit stopped flowing.

Unfreezing Credit

(a) Credit and security structure

Limited access to credit

Unfortunately, sometimes prices fail to perform this signaling function properly, as the dot com and housing bubbles in recent years showed.

Germany s Secret Credit Addiction

Consider also the credit markets.

The third tool is credit policy.