Disclaimer: this post is on a topic about which I don’t really know that much. Thus please don’t feel slighted if I fail to cite you or a favorite scholar on the topic.
NPR ran a fun story this morning with two reporters and a GMU economist (horror of horrors!) to address the common-sense question: where did the money go when the housing bubble burst? Essentially the economist and one of the reporters traded hundred-dollar bills for a plastic house, and they noted that the “size” of the economy wasn’t any smaller at the end of the set of transactions than it was at the beginning, even though the economist (ha!) had lost money on the purchase and resale of the house. The economist then pointed out that the problem was really that he “might have” decided to “behave as if” he had more money in the house than he would eventually be able to sell it for because of the run-up and subsequent decline in the housing market. It was this money — which he said “never materialized” — that “disappeared” in the market collapse.
The story was nicely done, and I think it’s an example of the clever way NPR sometimes goes about reporting to answer questions many listeners have. However, it occurred to me that a number of issues emerge from the discussion that could use further addressing:
- The “size” of an economy is a funny idea, but it’s probably not best measured by the money supply, which is essentially what the reporters did. It’s probably best measured by something like GDP, which in turn is really about the flow of money over time, since that represents value traded. That leads to my next point:
- Time is tremendously important in economic behavior. A fixed number of dollars loses value over time; interest represents money over time; and in this particular case, home values matter not because of beliefs but because the home needs to be monetized at a particular time. Thus value itself can only be understood as value in a particular temporal context. Finally, that leads to my third point:
- You can’t understand any of this stuff without understanding the productive role of debt. I remember the “eureka” moment in my undergraduate macroeconomics class when I understood what the prof meant when he said that banks literally make–as in create–money. Debt can be understood as a risk-value package over time. So it’s not just that the economist “might have behaved” as if he had money because of the home’s point-in-time value, he really did have money at that point because of the debt system’s role in producing money.
I’m sure there are nuances and distinctions here, and I hope y’all will help out with them.