The Joe Walker Podcast - Housing Bubble Week Epilogue: Not All Bubbles Are Created Equal - Vernon Smith

Episode Date: September 27, 2020

Vernon Smith won the Nobel Prize in Economic Sciences in 2002. Show notes Selected links •Follow Vernon: Website •Rethinking Housing Bubbles, by Vernon Smith and Steven Gjerstad •'Debt Deflation: Theory and Evidence', address by Mervyn King •'Is the 2007 US Sub-Prime Financial Crisis So Different? An International •Historical Comparison', paper by Rogoff and Reinhart •'Global Household Leverage, House Prices, and Consumption', FRBSF Economic Letter by Reuven Glick and Kevin Lansing •'Dealing With Household Debt', chapter by the IMF •'The great mortgaging: housing finance, crises and business cycles', paper by Jorda, Schularick and Taylor •'Leveraged bubbles', paper by Jorda, Schularick and Taylor •'Housing and the Economy', 2019 speech by Guy Debelle •'Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets', paper by Vernon Smith, Gerry Suchanek and Arlington Williams •A Life of Experimental Economics, Volume I, by Vernon Smith •The example scenario of pessimists and optimists buying 100 identical houses is from House of Debt, by Amir Sufi and Atif Mian •'The Leverage Cycle', paper by John Geanakoplos •'Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment', paper by Brad Barber and Terry Odean •The Wisdom of Crowds, by James Surowiecki •'The Clinton Housing Bubble', WSJ article by Vernon Smith •''We're heartbroken': home in same family for 93 years passes in', 2018 The Daily Telegraph article •'Why are we so worried about household debt?', See omnystudio.com/listener for privacy information.

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A little over six months later, the biggest US housing bubble in a century began to burst. The great irony in Bernanke's remarks was that for all his erudition as a scholar of the Great Depression, he failed to heed the observation Irving Fisher made in 1933 in The Debt Deflation Theory of Great Depressions. Overinvestment and overspeculation, Fisher declared, are often important, but they would have far less serious results were they not conducted with borrowed money. The guest for this episode, who I'll shortly introduce, sent me a striking chart, one that he'd created. The chart explains why the Great Recession was so great. It explains why wealth inequality widened in its wake. It may explain why the Great Recession was so great. It explains why wealth inequality widened

in its wake. It may explain why the US and other advanced economies seem to be stuck in the swamp of secular stagnation. And, given that financial crises have been shown to drive political polarization and an increase in the voting share for far-right parties, it at least partly explains why Donald J. Trump was able to ride a wave of popular resentment all the way to 1600 Pennsylvania Avenue. In short, the chart explains why not all bubbles are created equal. The chart itself is simple. It depicts three lines marked A, E, and D. A sits on top and represents the total value of households' real estate assets in the United States. It rises continuously from 1997 to Q1 2006, the bubble years,

before falling rapidly to Q2 2012, where the chart ends. Below line A is E, E for housing equity, that is, residential assets minus mortgage debt. E follows roughly the same gradient as A. The third line is D, which stands mortgage debt. E follows roughly the same gradient as A. The third line is D, which stands for debt. D is more stable than A or E. Looking at this chart, something remarkable happens in the last quarter of 2007. E slips below D and stays beneath it for about five years. The chart is available on my website, josephnoelwalker.com, but I'll return to why it's so important in a moment. Housing bubbles are a creature of the post-war era, an era that some economists have come to

call the Great Mortgaging, and an era in which national home price indices first began to be published. Before there were housing bubbles, there were land bubbles. A notable feature that juts out from the history of real estate bubbles in general is just how commonly they end in nasty recession. There are a few exceptions which prove this rule, such as the 1880s land boom in Los Angeles, during which banks seem to have been reasonably conservative, and the subsequent recession relatively mild. If you know of any other examples, I'd love to hear them. A burgeoning body of empirical research has elucidated the risks posed by housing bubbles to financial and macroeconomic stability. In what briefly follows, I'm going to give you a whirlwind tour of the literature to leave you with a clear sense of why this matters.

In 1994, casting his eye back over the booms and busts of the 80s, former Bank of England governor and former guest of this podcast, Mervyn King, found that countries with the largest expansion in household debt-to-income ratios from 1984 to 88 witnessed the largest shortfall in real GDP growth from 1989 to 92. In 2008, Carmen Reinhart and Ken Rogoff evaluated five major developed country financial crises, Spain in 1977, Norway in 1987, Finland and Sweden in 1991, and Japan in 1992, finding that on average residential real estate prices peaked a year before the onset of the financial crisis and had fallen by 22% four years after the peak. In 2010, writing for the Federal Reserve Board of San Francisco,

Reuven Glick and Kevin Lansing noted that countries exhibiting the largest increases in household leverage from 1997 to 2007 also tended to experience the fastest rise in house prices over the same period. They found that these same countries also tended to experience the most severe recessions. In 2012, the IMF analyzed advanced economies over the past three decades, finding that the housing busts and recessions preceded by larger run-ups in household debt tended to be more severe and protracted. In 2014, Oscar Jordan, Mark Schulerich, and Alan Taylor studied bubbles in housing and equity markets in 17 countries over the past 140 years. They found that since World War II, it is only the aftermaths of mortgage booms that are marked by deeper

recessions and slower recoveries. In a subsequent paper, they concluded that asset price bubbles and credit booms may be harmful, but the interaction of the two sowed the seeds of severe economic distress. Moreover, they found that leveraged housing bubbles turn out to be the most harmful combination of all. In 2015, Atif May and Amir Sufi and Emil Werner found that for a panel of 30 countries from 1960 to 2012, an increase in the household debt to GDP ratio over a three-year period in a given country predicts subsequently lower output growth. All of this research is linked to in this episode's show notes. But what accounts for this relentless relationship between housing bubbles, household debt, and economic destruction? This podcast episode seeks to answer that question by invoking the concept of a balance

sheet recession. Every housing bubble is pricked in its own way, but all housing busts are alike in the macroeconomic havoc they wreak. Housing is the democratic asset, and it represents the largest purchasing decision in most people's lifetimes, so housing bubbles invariably entail large amounts of mortgage debt. When a housing bubble ends, things don't just go back to the way they were before. Like a high tide at a Sydney beach that recedes, leaving the sand littered with blue-bottled jellyfish, a housing bubble subsides, leaving people saddled with stinging debts. Put another way, when asset values fall against fixed debt, equity collapses disproportionately. This outcome arises from the very nature of debt itself as a financial contract

in which the debtor has the junior claim. Leverage is a two-edged sword, but it cuts deep on the downside. Returning to my guest's chart, when housing equity collapsed in the United States, for many homeowners it turned negative. This was the source of damage to household balance sheets that so haunted the United States economy for five years running. According to CoreLogic data, in 2011, 11 million properties, or one out of every four properties with a mortgage, had negative equity. It's a statistic which still boggles the mind. Perniciously, in a balance sheet recession, those whose financial assets mostly consist of housing also have the highest marginal propensity to consume out of housing wealth. And while belt tightening is sensible for these individuals, when scaled up to the collective, it shudders

through consumption like the Grim Reaper's scythe. To make matters worse, damage to household balance sheets is then transmitted to bank balance sheets through delinquency and foreclosure. Banks tighten their lending, contracting the economy further. Imagine a point in the life of the universe where the laws of physics suddenly change. Maybe we tweak gravity a little, make it a strong force. Your soda can crumples to the desk, birds drop from the sky, Earth's orbit passes closer to the sun, making the temperature unbearably hot, and every living thing moves at a sluggish pace. The economic equivalent of this world is the balance sheet recession, an upside-down economic universe where, in the words of Taiwanese American economist Richard Koo, consumers go from being profit maximizers to debt minimizers. The story of Manolo Marban

from Spain provides a human illustration of this financial transmogrification. When the New York Times spoke with Manolo in 2010, he was 59, living in his house in Toledo and working in a small pet grooming shop. Both were properties he brought during Spain's housing bubble. Both were foreclosed in April 2009. At the time the article was written, Manolo was waiting for his eviction notices. Like Australia, Spain has recourse lending laws, meaning Manolo would still owe the bank more than $140,000 even after he'd been evicted. I will be working for the bank for the rest of my life, he told the paper of record, tears welling in his eyes. I will never own anything, not even a car.

It's difficult to imagine someone in Manolo's position being able to take entrepreneurial risks. The rest of Manolo's life will likely be spent minimizing debts. Australia maintains some impossibly expensive housing stock, and it has the second highest household debt to GDP ratio on the planet. This podcast episode makes no public prediction about the path of house prices. Instead, it simply seeks to draw attention to the fact that household debt renders an economy fragile. To be sure, there are several factors counting in Australia's favour, not least a flexible exchange rate and the fact that most of our household debt is held by the top two income quintiles. Nevertheless, significant risks remain. In 2019, I ran a seven-part series on housing bubbles in general and the Australian housing market in particular.

It was popular, garnered media interest, and the podcast was the number one show in the Australian iTunes business charts. But one of my regrets was that the series finished with an interview with the brilliant American economist Ed Lima. That conversation happened to focus on how housing bubbles go hand in hand with construction booms and how the subsequent construction bust detracts from GDP growth. The problem with ending the series on that episode was that it left some listeners with the impression that construction busts are the most consequential thing about housing bubbles. And yet the most important contributor to a recession in a housing bust is not the construction cycle, it's the price cycle. That's why the downturn in Australian house prices between 2017 and 2019 failed to produce a recession. In 2019, Australia's governments, regulators and central bank regained control of the price cycle after the May 2019 election. By October 2019,

Deputy RBA Governor Guy DeBell noted in a speech that the construction and price cycles are clearly highly interconnected. Both reflect the standard economic forces of supply and demand. Both cycles often move in sync, but this time they aren't. As this episode's guest argues, the gravest risk posed by housing bubbles is the harm that the price down cycle inflicts on balance sheets. This episode is the one I always wanted to be the capstone to my series. And more than a year after that series ran, the epilogue is more relevant than ever. Our guest is Vernon Smith. Vernon shared the Nobel Prize in Economic Sciences in 2002 with Daniel Kahneman. Vernon is the father of experimental economics, which uses scientific experiments to test economic questions. He discovered book called Rethinking Housing Bubbles, a book which has helped me in my understanding deeply.

In 2015, while visiting Australia, he said that the Sydney and Melbourne housing markets had a quote-unquote pretty good bubble. Vernon was born before the Great Depression. He is 93 years old, though he was 92 when we recorded this. He is still an active scholar. He is an amazing man. I can only hope that I'll be as sharp as Vernon is when I reach my 90s. In his 1989 review of Hyman Minsky's book Stabilizing an Unstable Economy, another Nobel laureate, James Tobin, identified excess credit as the Achilles heel of capitalism. Perhaps with a few decades hindsight, we could be more specific. In the post-war era, it's not private debt as such that's the problem. It's household debt, even more specifically,

mortgage debt, that has become the Trojan horse by which capitalist economies are repeatedly laid to waste. Vernon Smith, thank you so much for joining me. Thank you, Joel. I'm happy to be here. I love Australia. Vernon, as I told you before we started recording, I've come to think of you as like my housing bubble rabbi. And after being confused and perplexed by the events occurring in Australia and our long-running housing bubble, I thought it was time to seek out my rabbi for a bit of advice and a bit of wisdom. So I'm very glad that we get the opportunity to speak. But before we discuss

housing bubbles, I'd like to introduce you to people and dig into your background a little bit. Do you remember your earliest memories of what that environment was like back in the 1930s? Well, Joe, I was born before the depression. I was born in 1927. To give you some perspective, Babe Ruth hit 60 home runs in 1927. And so when the Depression started, I was three, and it pretty well hit a low around 1932, 1933 when I was five and six. And by then I was living on the farm. I was born in the city, but my father was laid off. And it turned out we owned a farm. And that's because my mother's first husband had been a fireman on the Santa Fe Railroad and was killed in 1918. And so my father married a

widow. Well, there was some life insurance money and then had invested it in a farm of course the farm we ended up losing about 1934 so that's the way life was you see you know and and in those days so i went to uh in 1932 33 i went to a one-room schoolhouse, and that was an incredible experience. How does a one-room schoolhouse work when it includes multiple grades? Well, there's eight grades in one room, and your teacher is Mr. Hamburger, a local German farmer. He could speak English. And of course, he knew arithmetic.

So he's the teacher. He was well qualified. And actually, indeed, he was well qualified in the sense that he knew his audience, you see, quite well. And so it was a comfortable world. And on the first grade, I'm in the first row on Mr. Hamburger's right. And the second grade is the second row. And then the third, okay? So the class begins, and Mr. Hamburger has some questions and there's some discussion with people in the first row. And then he leaves you with some homework and he goes to the second row. Well, you see, if you finish your homework or your desk work, I should call it, because we didn't do homework.

We had desk work right in the school. Then you saw what the next row was doing. And so you had a sense of the total that I think no one, you don't have today. And interesting, because at the end of the first year, Mr. Hamburger sends a note home with me to my mother, and it says, Dear Mrs. Smith, Vernon can read the second grade reader, so next year he goes into third grade. So, in other words, you just skip the second grade if you can already read the reader, and the reader was the litmus test, You see, that was kind of what determined.

So we moved back to the city then and I was, I wasn't advanced a whole grade, but a half a grade. But anyway, that was a great experience for me. And it was a lonely time. See, I didn't have any class, any playmates other than at school. So, uh, I think that in a way helped me become, made me self-sufficient mentally because I read a lot. Yeah. You see, I read and, and, uh, and that's the reason why I was such a good reader. I believe that at the end of high school you had a C average with just one A in woodworking class. That's right. How did you choose to go to college and how did you identify the college that would be best for you? Well, of course, I didn't have anyone in the family that had been to college and that's usually

kind of where you get information about how to choose a college. And so I got a book out of the library, the municipal, the Wichita City Library, on how to choose a college. And I started to read it. And early on, it said, well, the best college in the United States is Caltech. And so I thought, well, why should I read this book? I'll just go to Caltech. You know I thought, well, why should I read this book? I'll just go to Caltech. You know, it's incredible, you know, and, but I did realize I would have to really work hard. So I enrolled in, at Friends University, which was a local,

uh, just a few blocks from my house, half a mile maybe, a local Quaker college, and good teachers there, excellent. And I took courses in physics, chemistry, mathematics, astronomy, and was able to sit for the exam a year later and get into Caltech. So without that year of really hard work, I would never made it. You see, I just didn't have, neither my grades were good enough in high school nor the courses that I took were not rigorous enough, you see. So that worked. And I finished at Caltech in 1949. By then I got interested in economics. And I went back to the University of Kansas, got a master's degree there

and ended up staying in economics. And I never looked back. Okay. So my degree there was in electrical engineering. Now, it's interesting, because after I got into experimental economics, we started to do real live applications out there in the world. And one of that, one of those applications was creating a market for electric power on a high voltage grid. And so I was able now to use my economics, my experimental laboratory work, and my background in engineering to work on the creation of markets. And that took me to Australia, 1993 to 1995. So I want to come to experimental economics, this field of which you're considered a founding

father. But before we do, I finally just want to return briefly to the Great Depression. So you mentioned that you moved to the farm when you were about five years old, so this was 1932. What was your sense of the quote-unquote Great Depression at the time? I mean, I don't think people actually referred to it as the Great Depression at that point. I think they might have just used the phrase hard times. But from the prevailing atmosphere, what do you remember about that period economically? Well, I remember it was a very difficult time for my parents. Right.

And the house they owned in the city was clear. They owned that outright. They paid off the debt on that. And that provided a cushion. But it was hard times, very hard times. And in fact, it was a hundred and sixty acre family farm so the only income is from the sale of wheat and in Kansas that's June. In June you harvest the wheat. There's no the only source of income during the year was the sale of cream. And I remember my mother saying that that was 85 cents a week for the sale of probably a few gallons of cream that was separated from the milk cows and marketed.

So there was very little cash coming in. And you only use cash to import stuff that you couldn't make or grow. That meant mason jars. You had to buy mason jars because you can't. Mason jars is the way you can fruit and vegetables, even meat like sausages, you would can for home can for winter consumption. So lots of fresh vegetables and chicken, of course, and occasionally you would slaughter a hog. And so that was the meat. But we were just completely, you see, self-sufficient. And that's what got us by.

And in fact, it's the reason why the thought was, well, we'll move to this farm because at least we can eat there. And indeed, we did, we ate very well. And because in those days, it was really difficult in the cities, a lot of people in poverty, that meant they weren't getting food, you see, or at least as much as needed. And that was one advantage of living on a farm. So I remember that very well and I remember it very, very fondly. And of course for me it was an exciting time. You know, a kid aged five to seven learning about fixing fences and learning about fishing in the creek and learning about farm animals, gathering eggs sometimes. We often would gather eggs just before we cook them. Well, they'd be

warm. Some of them would be fresh laid. And things like a child remembers every once in a while an egg would be double yoked. Well, you don't buy those anymore. They're candled, as they call it. They're screened so that you don't buy double yoked legs. Well, things like that was part of the novelty of living on the farm. So Vernon, let's fast forward. So back through your education, then you get your PhD at Harvard. And now let's come to experimental economics. Experimental economics is going to lead us into housing markets. So let's start with experimental economics. And let's start at the economics and let's start at

the very beginning of experimental economics, this field you helped create. How did you first come to experimental economics? Well, I was teaching principles of economics and I realized my first semester at Purdue that I didn't understand anything about the connection between kind of what people do on the ground, so to speak, and the economy and the supply and demand theory that we taught. And I'd had a professor at Harvard who had performed a little classroom experiment and it was designed to show that basically markets don't work. Well he just did one trading session and didn't repeat it. And also it was what today we would call a random meetings economy. People just, buyers and sellers would circulate and if a buyer ran into a seller, why they

would try to negotiate. Well the buyer you see has been assigned a ticket telling that buyer what the value of the item is to him, meaning that if he buys below that value, we're going to pay him the difference. So if you're a buyer and I give you a price or a value of 10 and you buy for 8, you just earn $2. So you're motivated to buy low. Similarly, a seller has a value but owns the unit. So it has a value if he keeps it.

If he sells it, the price has to be above that value. So you can take a group of buyers and just give them random values. And if you ram from highest to lowest, you've got a demand schedule. That's exactly what we mean by a maximum willingness to pay schedule. And if you take the seller's values and array them from lowest to highest, you have a supply schedule. So it's a nice way to teach as it turns, as well as learn. And in that case, I was learning easily as much as the students because I'd never done it before. And I did the experiment so that it was an open outcry, two-sided auction. Okay.

So I figured that would give this thing a better chance to converge. But I didn't really expect it to converge to the supply and demand equilibrium. And I repeated it over time. So we had a trading day was maybe five, six, seven minutes, and then we'd repeat that and people would have their values and costs replenished. Well, the first one I did it and it converged to the equilibrium very close with just in about three or four periods. I thought, well, you know, there must be something wrong with the experiment. But it really, you see, we were completely unprepared for this idea that a completely do-it-yourself market,

people that didn't know any economics, didn't understand necessarily anything about markets, would actually find the equilibrium. Well, they did. And I thought in that first experiment, it might be an accident of the fact that it was a completely symmetric supply and demand. So the clearing, the equilibrium clearing price was also the average value and the average cost of the buyers and sellers. So I did an asymmetric one where most of the profit was going to the sellers and not so much the buyers.

That converged too in about the same amount of time. So over the years, I just disabused myself of this notion that markets were not completely capable of operating on their own. And finding, you see, these equilibria, which the people in the market don't even know about, you see. And of course, most of us are in a market a while. It's stabilized. Most of the markets we're in, they've been stable for a long time. And there may be a shock, like if there's a cut off of supply or something like that and we see those kinds of adjustments now now that was a

market for perishables you see this was not nobody was buying anything that could be resold. They were buying them to use to get their value okay and achieve that. And we were of course at the time I realized that you could also study markets for durables something that had a horizon that lasted, that wasn't consumed during the period, but could be retraded. So years later, we ran our first asset market experiment. Well, the first markets worked far better than we expected. The asset market didn't work as well as we thought it would, because we gave everyone complete perfect information. They knew what the fundamental value of this asset was because there was a dividend that

yield every period. So they're trading say for 15 periods, there's 15 dividend draws. So in the first period, you're trading something that ought to have a value of 15 times the one period expected dividend value. So there's a kind of well-defined fundamental value. And moreover, we explain this to everyone. And then at the end of each period, reminded them, well, next period there's 10 periods left and so you're going to have 10 more draws. It's averaging 24 cents a draw so that's $2.40. Well they pay no 1 to 15.

Well, what happens is it starts out trading below fundamental value, rises, rises above the declining fundamental value, peaks out and then crashes near the end. So we just were baffled by that and this is even though you've told everyone at the beginning of the experiment what fundamental value is yes wow it's the whole and we call it the holding value

we said if you just sit there and do nothing and collect dividends on average this is how much money you'll end the experiment with so and they not only knew that On average, this is how much money you'll end the experiment with. And they not only knew that, but we reminded them every period. And it's interesting. You know, some people worry that people may want to, their actions may be geared to pleasing the experimenter. Well, there's no way in which you could argue that in this case. So, but they do learn, bring them back a second time and a third

time and they quit that. Okay. And they'll trade close to fundamental value. So what we learned was that you see, people don't get into equilibrium in these asset markets just by thinking about it. They have to actually experience. And, of course, that's not very helpful out there in the world because you can't rerun, you know, the last 20 years two or three times so people understand what the consequences of a bubble is yeah many people many people only buy one house in their lifetime yeah exactly so there's nothing like you see the learning that we could create here in the laboratory yeah so anyway this turned out to be uh just as the first exercise fueled a whole lot of experiments, a lot of studies in equilibrium convergence and in markets for non-durables. So now we have a bubble generating engine, which we had no expectations that we would observe.

So you discovered these bubbles by accident oh yes both of both of these we we in the first experiments we didn't expect the markets to work as well as they did we got very accustomed to that and so by the time we're doing the uh above the what turned out to be bubbles experiments we thought they would work very well because they had all this information. Well they didn't. They had to actually experience that you know you see so with experience fewer and fewer people are are willing to sell below fundamental value and fewer and fewer people are willing to sell below fundamental value and fewer and fewer are willing to buy above it.

And so it comes into the equilibrium. But it's a much different process than for non-durables. Vernon, changing tack for a moment, what's the secret to a perfect hamburger? Oh, well, yeah, yeah. Well, I think it's fairly simple. And that is you have your hamburger patty and you have your bun. All right. You put the hamburger patty not on a, you put it in a skillet, not a griddle, because the fat and the juices, it's important that they not drip through. And you put the top of the bun on the hamburger and the bottom off to the side to so that it will it will uh toast right and then when you turn the hamburger you move the top over and let it toast and put

the toasted bottom half on the top that's the way you do it that's the way i learned from Don Eaton at the OK Drive-In in Wichita, Kansas, when I was 14 years old, 14 to 16, I worked for him. So, and then you, you know, mustard, pickle, sliced onions, and very thin sliced tomatoes that you pile on and everything. That's the secret to a great hamburger thank you for that just so everybody knows where this comes from you you discuss the the secret to the perfect hamburger on page 90 of volume one of your memoir which is one of the most brilliant memoirs i've ever read you kind of veer from you know social commentary to deep economic insights and talking about hamburger recipes but something something interesting i learned from you in the hamburger passage was it's about the surface area of the ingredients not the volume yes yes and that's why uh pickles uh tomatoes should be sliced very thin yeah and

and it's all right to have pile them up a little but you see that gives you lots of surface area and and the hamburger needs the the meat needs to be out full to the edges of the hamburger, okay? And it's okay. It doesn't have to be thick particularly to have really good flavor. Yeah. And so you want a lot of surface area because that's where the aroma comes from. And it hits more taste buds as well, I suppose. Exactly.

Yeah. You want to stimulate those taste buds. Okay, but in all seriousness, that kind of gives us a nice metaphor or image for thinking about markets for perishables. So on the one hand, we have hamburgers. And when you were running experiments for markets in hamburgers, you weren't expecting them to perform so well, but they converged very efficiently to equilibrium during the experiments. And then on the other hand, we have markets for long-lived durables like homes, and you were expecting those to be very efficient, but accidentally you found bubbles. So we have markets in hamburgers and markets in homes.

Now, I want to ask you more fundamentally, what is the reason for the contrast in these types of markets? Oh, well, I think it's very important for everyone to understand that in the modern economy, most consumer goods cannot be retraded. In the US, about 70% of private final products, see, we're talking about final products. That's consumer goods, homes, capital goods. You see, a machine is a final product, but it's going to be used to produce other things, okay, or a factory is a final product. A home is a final product. Hamburgers and haircuts are final products. Well, most, 70% of that final product is made up of what I call hamburgers, haircuts, and hotel rooms. Okay? Those are the triple H.

Those are things that you don't buy those to resell them. You buy them to use. In fact, you can't imagine a haircut, you can't consume it without, you see, it's part of the service. All services are that way, and of course, services bulk large and in final goods. So that's what gives the economy so much stability, you see. And think of that as a big flywheel. Okay, the economy is a big flywheel that gives a lot of inertia to keep moving along. Now, the instability comes from this stuff that can be retraded. But particularly, and what's that mostly? Well, it's automobiles and homes, and mostly it's homes, you see, that cause trouble.

Because these homes, they last maybe 75 to 100 years if you take care of them. And you buy them mostly with other people's money. Well, that's a prescription for disaster because you see, if you're buying them with credit, that drives a wedge between use value and reach and retrade value. Okay. If credit is flowing in, well, the good isn't any more useful, but it has a higher, it can have a higher retrade value. So you can get the prices of goods for retrading separated from kind of a price as a measure of the value in use, like the price of a hamburger or a haircut gives you the value in use like the price of a hamburger or a haircut gives you the value in you so those are

really element very very very elementary things that anybody i think can easily understand and and i think your your uh your viewers uh i i'm sure they can relate naturally yeah you see to that but vernon this is exactly why i wanted to get you on the podcast and and share you with my audience i i haven't come across many other economists who've thought about housing bubbles from such a first principles standpoint it seems to me you've really gone to the first principles of how these markets work which I think is just so useful and and reading your book rethinking housing bubbles reminded me of reading Irving Fisher I'm not an

academic but it was so clear and lucid. So thank you. And look, I want to raise an idea here. There's something else about the introduction of credit. And, you know, then maybe we can talk about your is even deeper than credit opens the door to resale or exchange value. And what I mean is that I think credit transfers power over prices to optimists. And let me explain what that means okay imagine you have 100 identical houses okay and okay and you have a world where there are pessimists and optimists and they have different views about what the intrinsic value of those houses is uh And as anyone who's been around a barbecue and discussed

house prices will know, that's probably a fair description of reality. It's what economists would call heterogeneous agents. So what will the value of the houses be? So now in this world, the pessimists think that the houses are worth $100,000 each and the optimists think the houses are worth $125,000 each. So what will the price of houses be? Well, the answer to that question depends on the makeup of pessimists versus optimists. Now, assume that this is a world without credit, but the net worth of the optimists in this world is $2.5 million. So, at a value of $125,000, the optimists could buy 20 of these 100 identical houses. Now, due to competition, it would imply that for the market to clear, the price of the houses would actually end up being $100,000 because the pessimists have to buy the other 80. Okay. Now, let's introduce credit and let's assume that you only need to put down a 20 deposit

so you can get a loan of you know you can get an lvr of 80 now suddenly the buying power of the optimists has skyrocketed to 12.5 million dollars and they can buy all of the 100 houses for 125 000 each and the price of those houses will be 125 000 so and this is an idea i get from john genocopolis he has a great paper called the leverage cycle which i think you cite in your book with steven gerstad and i think that's a powerful idea as well credit transfers power over pricing from pessimists to optimists because essentially as you'll see through my example hopefully i stepped through it clearly enough um it allows the same group of you know a small group of marginal buyers to buy more assets yes and so in a housing bubble you have a situation like you had in america during

the 2000s or australia over the last 20 or so years where you have a lot of people speculating on houses on the resale value buying property portfolios of three four five six or more investment properties yes I like your metaphor on pessimist versus optimist because in fact that that suggests an experiment. Suppose you the psychologists have a measure. Yeah. That separates people in classes in two classes, and one might be called optimistic, and the other pessimistic. Well, then you could recruit only the pessimists to be in a, a book in an asset trading experiment and also only the optimist. You can have an all optimist and all pessimist group. In fact, in our lab, you could run them at the same

time in the same room because it's large enough that you could have some people in one experiment and some in another. And in fact you could actually do that. And in fact these are the sorts of exercises that a lot of people have done using the asset trading environment. They've tried to identify, you see, psychological factors that would make a difference. Well, for example, male done this. And they don't know the women don't trade as much. I mean, they buy and hold relative to men and they do. So yeah, and they do better. Yeah, they outperform the man and because the men are out there trading and they're missing all of these by selling too soon or buying too late.

And there have been some of those studies done in the laboratory, many of them, of course. So these are the sorts of many of them of course. So these are the sorts of exercises that people can do. I don't do a lot of that, I'm kind of interested more in kind of the basic issues of market and also not only market performance but market design. How do you create a market for something that's never been traded before? So Vernon, coming back to your asset market experiments, just to drive this point home for people,

what happened when you introduced credit? Oh, well, that greatly exacerbated the bubbles. And and in fact we didn't do very many of those because they were they were just so so wild and and also you see if someone goes bankrupt i kind of have to eat it i don't have i had we had some uh some uh penalties in there but if if someone has lost everything you can't take a money away from it yeah what you try to do is giving an endowment you see and then that is his that out of which he has to pay any losses so he goes away with less than otherwise. But we had the problem that some of those endowments were zero or even negative at the end. But anyway, yes, both buying on margin and selling short, and that means you're just selling borrowed shares. See, so there's a pool of shares that you can borrow and sell but then you have to buy them back to pay back the loan of shares. So it's the margin

buying can either involve shares or cash. And of course one of the stories you hear is that in a bubble people who see it will can sell short and that'll help to moderate the bubble. Well but the problem is we had people shorting too soon and then the price continues to go up and they buy to cover that position and lose money. And so they're actually, unless their timing is right, you see, a short selling can exacerbate the bubble. And so we had cases like that in the laboratory. Now, were all of the subjects you used for these experiments students most of them are students but i also ran them with businessmen people in the finance industry if i went to a financial

conference or something and a business finance i would run one of these one of these experiments and they all did it i mean we all got i mean we got bubbles from from all all of these experiments. And they all did it. I mean, we all got I mean, we got bubbles from, from all of these different groups of subjects. We didn't replicate enough to be able to say that any one group was worse or better than another. But we were getting deviations from fundamental value you see and and very commonly now in terms of the the psychology of housing bubbles there's a fascinating point in your book with steven where you talk about how markets for long-lived durables might actually facilitate a different psychology which is in turn conducive to the formation of bubbles and you cite some work a book called the wisdom of

crowds by siri from 2004, where he gives an account of group behavior and the following conditions characterize situations where group behavior leads to the wisdom of the crowds. And those are, number one, a diversity of individual information or opinion as it relates to outcomes number two independence of the individuals information from that others number three decentralization of the

dispersed individual information and number four an aggregation principle or mechanism exists for producing outcomes from the dispersed information. How do markets for things like housing differ from those conditions and produce something different to the wisdom of crowds? Well, there's a lot of interdependence there because people are looking at the same rising prices, you see, and the bubbling prices. And so, and you have, it's very important, I think, in housing bubbles to have this flow of credit, you see. As far as we can tell, that's a pretty important part of what kind of get these things fueled and going.

But people are all looking, you see, at the same rising prices. They've seen the capital gains that they're getting and everything. And so that puts everybody into a waiting game. And how long, you see, should I wait and let this thing run before I sell? And this is where kind of the momentum, that is the fact that prices are rising, you see, tends to give you a momentum elements in the picture. And it's the, those that are kind of trend followers and trade very much on momentum, they are very dependent upon having enough money. So there needs to be enough credit flowing in there to keep them active.

And so that's why in our experiments you see when people can borrow, when they can trade on credit, it very much exacerbates them. People that are just looking at fundamental value, that's not going to affect what they do, you see. They're buying if it's below fundamental value, selling if it's above. Whereas the momentum traders, they tend to buy in proportion to the rate of change in price got it so if the if prices if price change is positive and increasing they're in there buying more and more yeah and when that turns they then become sellers that's the reason why these things can crash so very rapidly yeah vernon let me let me offer an historical perspective which i think supports both of your points about the way credit and the interdependence of agents create housing bubbles.

So, you know, before there were housing bubbles, there were land bubbles. But I think on the historical record, it's fair to say that housing bubbles are really a creature of the post-war era and I think it's no coincidence that financial liberalization began in the 1960s allowing an expansion of mortgage credit to more marginal buyers and number two national house price indices only really began to be created and published in the 1970s, allowing people to observe changes in house prices and attracting speculative attention towards housing markets. Now, it's interesting because we had a very pronounced deregulation of transportation in the Carter administration. It started with airlines and move over to the ICC and impacted trucks and railroads. That was spectacularly successful. You know, everybody looks back on that and sees that it's very successful. Well, now think about it. Those are all services.

Those are not, transportation services are like hamburgers and haircuts and hotel rooms, you see. You buy them to use them. And those were services. Now, then late in the Carter administration and during the Reagan administration, that deregulation movement moved into credit markets and finance. That's a different world. That stuff is retradeable. And I think that has to be done much more carefully, you see. Consumer markets, let them go. Don't bother to regulate those. Listen, they work very well and don't have anything like the sort of problems that we run into with retreadable So I do think that when we deregulated all kinds of financial markets, the thought was that that can only improve their performance.

But I think, and I think that has been an important part of kind of the exacerbation you see of this this this problem of bubbles do you remember when you became interested in the US housing bubble did you start worrying about it before it had burst only short before shortly before in fact I have an article in the Wall Street Journal in December of 2007. Yes. And I think you titled it, We Have Met the Enemy and Here's Us, but they changed it to the Clinton housing bubble. Yes. You see, the media, you can't write your headline. They always do that. And I always felt, now, the Wall Street Journal has usually written a good headline to substitute for mine. But I didn't like that one because I thought we have met the enemy and he is us was a proper way to set that off.

Yeah. Because, and indeed, there was more than enough blame to go around, you see, in the housing bubble. And it's interesting because that's, of course, the fourth quarter of 2007, that's when the Great Recession began. But we had already had seven straight quarters of declining expenditures on new homes. But the flow of credit, mortgage credit, was continuing unabated into that industry, which means it's going into leverage. You see, it's the only place it can go. Same thing in the Depression, 1927, 28, 29, for three straight years we had declining expenditures on new homes but growing flow of mortgage credit, you see. And so it was just leveraging more and more highly. And so both of those, as we say in our book, were what we call balance sheet recessions,

and they're far more serious than the garden variety recessions we've had in most of the post-World War II period. Absolutely. We'll come back to this idea of a balance sheet recession because it's vitally important. But what was the point of that December 2007 article you submitted to the Wall Street Journal? And why did they change the title to the Clinton housing bubble? What my question is getting at is I want to work out how housing bubble or at least how your housing bubble began. We can identify the start of the housing bubble in August of 1997. proposing that capital gains on homes be tax-free for the homeowner, for an occupied home, the capital gains would be tax-free up to $500,000 for a married couple.

I think that is. So that takes one investment asset and really sweetens it, you see. And we see that as the primary trigger that started the housing bubble. But that was a very popular bill. Democrats, Republicans, both congressmen and senators, there was a huge vote in favor of that. So in that sense, there's plenty of blame to go around, okay? And politically, it was a kind of a brilliant move by Clinton. Oh, and by the way, much later, if you read, if you revisit some of the discussions since then, Clinton recognizes that maybe the advice he had was the best during some of that period. So, yeah. Yeah. So what's so interesting about that tax policy change is that it sweetens the deal on the resale value of housing.

Exactly. And you see, now, if you did that with all capital goods, I would favor that. You see, in fact, I don't see logically any reason to distinguish between capital gains and income. But the thing is business income. You see, the problem is we tax business income. You see, the problem is we tax business income. And that means that we tax corporate profits as profits, and then we tax it again when it's paid out as dividends to the shareholders. And that double taxation is coming right out of investment

and growth and jobs and I think it's a bad idea. And that by the way is very much influenced by Irving Fisher who you know he always favored in calculating your income tax every year you should be able to deduct any savings or investment that you do. And because any savings or investment is left in the circular foe of the economy and continues to work for everybody. And the idea is you leave it in and let it work for everybody and you don't tax it until

you take it out yeah and and so uh i think that's uh fisher was had a had a uh was a brilliant uh uh analysis of of taxation and growth and had it right but of course it's not a it's not popular yeah, Vernon, why your identification of the Clinton capital gains tax changes as the initiation point for the US housing bubble? Why that appeals to me is because it's almost precisely the same story in Australia. So I have long maintained that our housing bubble began around 1998 for much the same reason. People offer very different definitions or starting points for the Australian housing bubble. Some people say it began in the 2000s, some people in 1994, some people go back to the 80s when mortgage debt started to substantially increase,

but I think that's largely a function of different meanings and a general confusion around the definition of the word bubble. But looking at the departure of prices from intrinsic value as gauged by rents, I have always maintained that our bubble began in 1998, but to compare Australia to the US, what is so interesting about the year 1998 is that that was the year in which the Howard government, which was a right of center government, announced that it would abolish the indexation of capital gains and replace it with a concession to tax only 50% of capital gains in order to encourage greater investment. began only began in on the 20th of September 1999 however I believe the policy proposal was announced in 1998 because that was an election year and the Howard government subsequently won

that election and for assets acquired between the 20th of September 1985 and the 20th of September 1999, the taxpayer had an option of using indexation or using the 50% discount method. So once there was public awareness of the new policy in 1998, I that was the you know to use the minsky kindleberger jargon that was the displacement that initiated australia's housing bubble so it's interesting this the same story happened uh down under um well in the u.s you see the u.s home prices uh home prices adjusted for any inflation had been declining. Yeah. You see, they had reached a peak in 89 and then were declining and continued to decline until 97.

And that was the turnaround. Yeah. In fact, in that third or fourth quarter. So, they didn't turn around fast, but they started to move up, you see. And moreover, they tended to go up, move, increase at an increasing rate. See, most of our lab bubbles, they look like this. This one, the housing bubble looked like this at the US.s that's incredible it looks like a matterhorn yeah you see not a hill um now the next question i want to come to is why do housing so we've discussed how the u.s and austral Australian housing bubbles begin. Before that, we kind of discussed what sustains

them, you know, credit and beliefs. But now let's talk about how they end. And I want to begin by saying that a lot of people I discuss Australia's housing bubble with tend to fall prey to a simplistic syllogism that this is a bubble, bubbles crash, therefore this is going to crash and as soon as they see prices turning down they think this is it, it's on, this is the crash. But just because something is a bubble doesn't really explain when or by how much it will crash and i think we can when we're observing bubbles say sensible things about the existence of a bubble and the direction but it's altogether a more difficult, perhaps even an impossible question to answer what their magnitude or duration will be. And there's a quote of Paul Samuelson's from 1957, which I think summarizes this idea very neatly.

He says, quote, I have long been struck by the fact and puzzled by it too, that in all the arsenal of economic theory, we have absolutely no way of predicting how long a bubble will last. To say prices will fall back to earth after they reach ridiculous heights represents a safe but empty prediction. Why do some manias end when prices have been ridiculous by 10% while others persist until they are ridiculous to the tune of hundreds of percent. Now, do you have any ideas on this? How do housing bubbles end? And can we predict when they'll end? Well, you see, the momentum downward, you see, in many ways can be greater than the momentum up in terms of the rapidity with which things fall. And you see, it's interesting, if you read Adam Smith's first book, which is The Theory of Moral Sentiments. Which is the better one.

In many ways, yes. Actually, there's reason to believe that he liked it better. And he certainly put more of his life into the theory of moral sentiments and revising it and working on it. But he talks about there being a kind of a fundamental asymmetry between our joy and our sorrow. Adam Smith argues that from any kind of given level of reasonable sense of comfort, we always have much more to lose than to gain. And he uses this then to explain what has also be a factor in why these crashes can be so, so rapid and can kind of curse them quickly is that people are and as I don't know how this feeds into your pessimist versus optimist category, but it might. But generally, you see, we fear this loss.

And that means we're more likely to rush, you see, to protect what little we have left. Well. You see, and that can help to explain this sometimes it's called a herd effect you see in these markets. But they don't always work that way. You know it's Paul I think is right Paul Samuelson that we have no way of you know it's a complex system you know it's a complex system you know it's easily as complex as climate and and it's very hard to to predict because the volatility the very variation can be so great and and so um so so subject to two factors that we don't can't even

identify until maybe long after they have occurred that's right well Vernon it goes back to something we discussed earlier in this conversation which is that as soon as you accept that participants in a housing market are interdependent, you allow for nonlinear dynamics. In other words, a complex system. And that is inherently difficult, maybe even impossible to predict. I mean, you can probably compute where it might be over short time horizons,

but it's very difficult to say where it will be in a long-term sense. Yes. I quite agree. And we saw in the Depression, you see, the spillovers into the labor market. Yeah. And even consumer non-durable goods fell. That's very unusual because when GDP falls, usually non-durable consumer goods and services hold up quite well

and sometimes they will not even fall, they'll just flatten a little and then resume their growth. They actually fell, declined in the Great see, from 29 to 34. And a huge number of bankruptcies, like the, take the farm that we lost, that I lived on, that we lost in 1934 to the bank. They lost money on it too. We both lost money because it didn't cover the loan value you see. And so and that's of course what precipitated a lot of bank failures you see as well as well as household failures. And that you see that in a way finally puts the floor on it where yeah people are going back to zero for very close

now i'm thinking out loud here uh so please forgive my nascent thoughts, but you mentioned the fundamental asymmetry of losses and gains. This is an idea that, as you rightly pointed out, goes back to Vernon, but even before him it was discussed by the ancients. There are quotes of Cicero and Seneca which talk about this asymmetry. I have the Adam Smith quote here, page 213, The Theory of Moral Sentiments. And he said, We suffer more when we fall from a better to a worse situation than we ever enjoy when we rise from a worse to a better.

Now, this concept was formalized, you could say, by the person that you won the Nobel Prize with, Daniel Kahneman. He and Amos Tversky wrote about prospect theory and loss aversion. But correct me if I'm wrong, it might be worth distinguishing how loss aversion plays out for different participants in a housing bubble because we have the people who own homes, own investment properties for the resale value. These are the momentum traders and they'll cut their losses when prices start falling.

They don't want to bear the loss. They'll sell out, and that'll drive prices down further. This is kind of the classic stylized version of how a bubble breaks. But then there are, because we can't forget housing is fundamentally indistinguishable as an investment and consumption good we also have the owner occupiers and i suspect they behave very differently during a housing bust and rather than selling they will sit on their homes or list them for unrealistically high prices for the same reason which is loss aversion and that's a very interesting stylized feature of

housing busts you see the bid-ask spread widen you see home sitting on the market for a lot longer you see sales volume dry up there's an interesting paper actually by Janice over in Maya from 2001 they look at the Boston housing bust of the 80s and they find evidence of loss aversion for both owner occupiers and investors although the loss of those for investors was half as strong as it was for owner occupiers. Let me share a little anecdote, which I think illustrates this idea brilliantly. So this is an article. I collect articles like this.

This was an article from the 3rd of November, 2018 from Australia. The headline is, we're heartbroken home in same family for 93 years passes in so Chris and Brad Kerr say they're heartbroken after the Californian bungalow in their family for 93 years passed in for what seemed a ridiculously low price. So it was a home, a family home, they were trying to sell in Chatswood, and it passed in at auction, which means that the bidders didn't meet the reserve price

that the owners had set as their minimum. Now, let me quote from the end of the article. It's not just the money, it's the emotional attachment. This is Mr Kerr. my grandparents bought the house dad was born here my great-grandfather even lived here four generations of the foster family um and they estimated her grandparents had bought the house for about 5 000 pounds um this is old world australiana mrr said, with the streets all named after World War I soldiers and battles. And the article says the couple are hoping further offers are forthcoming in the coming

days. And it finishes with another quote of Mr Kerr, what's being offered now is just a bit too cheap. So this is a radically different experience to a property investor this is this is the endowment effect and this is the emotional attachment to not a good that's held for resale value but one that's held for its use value and loss aversion is going to cause these people to cling on uh rather than cut their losses right and. And that's, of course, a very important statistics in the housing market is how long you see the average home is on the market before it sells.

And people let that stretch out. Yes. You're quite right. And so that there is that group that hang in there that are reluctant to to actually realize the loss and so and and i suppose they also suffer from a coordination problem where they need to sell the house for a certain amount in order to to have the cash to buy the next home they're moving to. Yes. Yeah. Right. Yeah. Now, I suppose this leads us into the macroeconomic consequences

of housing busts. And I've had Ed Lima on the podcast. You'll remember he gave that speech to the Kansas City Fed in 2007. They asked him to present on the topic housing and the business cycle. And he titled his presentation, Housing is the Business Cycle. And at that point, Ed had identified that eight out of the 10 post-war US recessions were led by housing with a false positive and a false negative. Of course, now it's nine out of eleven. But you and Stephen highlight a similar statistic in your book.

But I believe you also broaden the discussion to the idea of balance sheet recessions, which is kind of a crucially important idea and to be honest i think it's an idea that the world needs to get a better handle on because it's it's created a kind of two-step forward one step backward dynamic um for many for many societies it brought japan to its knees so let's let's talk about the macroeconomic consequences of housing busts. I'm not sure how you want to kind of enter. I mean, this is quite a big discussion item. Yes. You're welcome to kind of begin however you'd like. Well, if you look at those post-war minor recessions, as we call them, look at what happens to housing equity. All it does

is just flatten. It might fall by 5% or 8% in one of the more serious recessions, but it doesn't fall catastrophically like it did in the Great Recession. So balance sheets, you see, are not really being badly damaged by people's investment in their home. It's just coming down, you know, a small amount. And it's interesting how those are always tend to be minor recessions. You see, housing is still a leading indicator, you see, of what's going to happen. It's very nice in that regard. But, you see, in those situations, the central bank also doesn't lose control over the housing market through lower interest rates.

But if balance sheets are badly damaged, you see, lowering the interest rate is not going to help. It's just not – it doesn't bring that demand back. Yeah, I think Richard Koo puts it nicely. He says, in a balance sheet recession, people have gone from being profit maximizers to debt minimizers. Yeah. Yeah. Yes, and so you see, that's the problem. Here's the thing I want to emphasize. Yeah.

Macroeconomics. You have to realize that our models don't really have capital in them in the way in which they're operating. You see, when you have a capital asset that falls in value relative to a fixed debt and really hits equity, that's not in our macroeconomic models. The macroeconomic models are flow models. You see, capital is in there as a service. You see, so you can't really capture this notion that that in addition to income, the the flows. Yeah, there is there are assets that can get the decline substantially whenever prices declined against fixed debt. Yeah, you see that's that you and and you might ask, Well, why isn't Why aren't they in there? Well, the problem is the system, you're modeling now a more chaotic system. And what you fail to do, see, most of the time, the forecasts are very good. Why? Because things

are not changing very much from year to year. We're good at forecasting if they don't change very much. It's like the weather. If it doesn't change very much, it's much easier to forecast. It's the major changes, you see, that are difficult to pick up. And to get the combination of mostly stable and little change with these kind of tipping point changes is very difficult to get that into the forecast. And so, you know, I think there's some of the similar problems in the climate models, you see. And there the science is, I think a lot of the science there is very similar to the economics.

It's very complex. There's a huge number of feedbacks and loops going on. And it's very hard to get in on top of those relationships, you see. And up isn't necessarily the same as down. You see, in climate, we've only had increasing CO2. Suppose now we back off and have less. It doesn't mean you come back on the same path, and there could be all kinds of loops there. So the economic forecasting continues to be very difficult unless things are not changing very much from period to period.

Now, I'm going to ask you a very obvious question, but my purpose is to help as many people as possible understand this idea. Just tell us what a household balance sheet is. Well, look, you've got a balance sheet. You've got assets that have some market value, you see, on the left-hand side of the balance sheet. And on the right, you have liabilities against those assets. For example, if you have a home and it's worth $100,000, then there's plus $100,000 on the

asset side. If you borrowed $50,000, then you have debt $50 50,000 and then what's your equity. Well it's the asset value minus the liability the debt is equal to equity and that's on the capital accounts on the lower right hand side of the balance sheet and it's that equity that is takes up any, it's kind of like a buffer, you see, if you have a decline in asset value relative to fixed debt. Now, one of the reasons why stock market crashes are far less devastating than housing crashes is because the loans are short term. They're basically callable loans, okay? In other words, if you have a margin account, you basically have given the broker the right to sell you out if you need to put up in cash and you don't do it. So as stock prices go up, you have stock market debt going up in step.

And when the stock price is turned down, debt goes immediately day by day down with it. You don't have this carryover, you see. So think of it this way. The balance sheets are cleaned up day by day as you go. The loans are called. It's very simple. Well, you see, that's kind of, that's not a good system for home ownership.

You're going to have, the system has to have a little more inertia than that, okay? So, and that unfortunately I think has not been adequately understood in the past. It's interesting in that Alan Greenspan in the spring of 2005, this is two years, you see, two and a half years before we had the beginning of the Great Recession. He wanted to have a conference on is there a housing bubble connected with the meetings in the spring of the open market committee. And the conference basically ended up with the conclusion, yes, we're in a housing bubble. It doesn't matter whether you look at price of homes relative to the price of other goods

or the price of homes relative to rents, were in a housing bubble. How much of an adjustment? They thought no more than 20%. Why? Because something like $10 trillion came off the value of securities markets in the dot-com crash of 2000, 2001, and it caused just a very minor recession. They missed the whole point. And that is with housing, the value comes down against fixed long-term debt. You see, so here comes the value, asset value is falling and here's debt is actually continue to rise. It even takes a while to flatten. And because the loans are what, 10, 15 and up to 30 years, the mortgage loans, at least in this country. And so it's just a completely different

thing. And also it's very widely held. Home ownership is the primary source of wealth for most people yeah and stocks is a very minor part of it uh so it's it's uh the volatility there in the stock market does a whole lot less damage you see the volatility in in the home price and uh markets now before our conversation, you sent me a couple of charts and one of them plotted three lines, real estate assets, mortgage debt and real for equity falls below the line for mortgage debt. And that chart should be on a T-shirt or something like that. I think that is such a powerful chart. Yeah, it is. And if it's okay with you, I might share it with our listeners as well. I can put it up on my website or something

so people know what we're referring to. Vernon, what happens when somebody falls into negative equity? Generally. Well, you're living in a house that you owe more on it than you can get by selling it yeah okay so you own eighty thousand dollars on the house and you can only get 65 or 70 by reselling it and people are very reluctant to take that hit yeah and in fact because you see we eventually tend to come out of all of these. And so people do recognize if you hang in there, you see, that you can expect to be whole again.

But in the meantime, you see, suppose you're in a home that's in negative equity and you're offered a better job somewhere else. OK, but you have to move. Now, you're going a better job somewhere else, okay? But you have to move. Now, you're going to earn more money if you move, but if you sell this house, you've got to take that capital loss, you see. And so people are very reluctant to do that. And so the labor market starts to get real sticky, you see, in a period when people are sitting in homes that are worth very little more or even much less than what they paid for them, they're very reluctant

to move. There's another lock in. When things get better, suppose you buy a home at a low mortgage rate and it booms. Now you're reluctant to move because you're going to have to pay a higher, you're going to have to pay a much higher interest rate wherever you go because interest rates have gone in and you've locked in a low one. Now that argues for some smoothing of that interest rate so that, in fact, the Canadians do that.

Those interest rates are adjusted over time so that you can't just have that much of a lock-in effect. Their housing market behaves somewhat differently than ours, partly for that. That's one of the reasons why. But this chart here, you'll notice that equity in the first quarter of 2006 peaked out at around $13 trillion. That's equity in all homes in the United States. Peaked out at $13 trillion, and in early 2009, it bottoms out finally at about $6 trillion. A little over $6 trillion, I think. Yeah, maybe six and a half. That is a huge hit. So that's almost $7 trillion wiped from household balance sheets. Exactly. Now that really hurts. That hurts. And that's across the board that's that's uh everyone in homes are being affected by that

some of those may be still be positive you see they're not necessarily a negative equity but many of them are negative and that's and that's all it's a so the equity value there yep in 2008 see see that value you people hadn't seen that low of value since clear back in the very early 90s, maybe late 80s. So it's a huge backsliding. This is the idea that I'm desperate to convey. You know, not all bubbles are created equal and the pernicious thing about housing bubbles is they represent a way of tricking people into taking on too much debt and then when prices finally subside when the tide pulls back out people are left holding fixed nominal debt but due to the nature of debt they

have the junior claim they lose the equity the equity, and suddenly they're underwater on their household balance sheet. I guess the other idea that's probably important to explain is the way leverage mechanically increases your vulnerability to price falls. So if we imagine that a house is worth $100,000 and somebody gets a 50% LVR, so they get a loan of $50,000 and they have $50,000 in equity, and imagine prices fall 10% from $100,000 down to $90,000. That person has lost 20% of their equity. But now imagine that they get a 90% LVR, so they put down a $10,000 down payment and have a $90,000 loan. Prices fall 10% again in this second scenario,

except because they're so highly leveraged, they've lost 100% of their equity. And the pernicious thing is that the people who get the high LVRs are generally the low and middle income borrowers who need to get a big loan because they don't necessarily have the deposit readily available. And they're also, even more perniciously, the sort of people who don't have many other financial assets. Their house is their main asset. And then I guess still more perniciously, they're also the very same

people who have the highest marginal propensity to consume out of their housing wealth so when their balance sheet gets wiped out in a housing bust they start to tighten their belts actually that's the other thing i want to ask you um speaking of of tightening belts what's the effect of negative equity on consumption well the point is everybody is into protection mode. They're trying to save more, of course. And the fact that the savings rate has gone up so much is part of the reason why, of course, the economy is doing poorly. But that's and you saw that big time, of course, during the during the depression when the household wealth took such a slam. Yeah, it was it was what's interesting about the 20s and 30s, you had prices going up of homes during the 20s, but nothing like occurred from 1997 to 2007. See, over the decade of the 20s, you had maybe a 20, 25 percent total increase in inflation-adjusted home prices. And what that meant is the huge flow of mortgage credit was going into more units, okay?

So that, in fact, the evidence indicates that homes construction was being expanded at about a constant unit cost. There wasn't a big increase in construction costs. So that you had lots of the debt being carried in sort of more units. The banks at the time, you see, didn't make long-term loans. These tended to be interest-only loans of three or four years, and then they'd roll them over, you see. So it wasn't, but it's still three or four years, you see,

and the system is being very much dependent upon those being rolled over. And that started to weaken. Banks were getting very reluctant to roll those loans over by 1928, 29, when the crash came. And those days, the down payments were larger, you see. So even though in some ways it looked favorable then relative to the Great Recession, in fact it wasn't. Because it was still vulnerable to a major deflation of those asset prices. It seems to me there's a couple of channels by which a housing bust generates a recession. One is the volume cycle. It's a construction bust, it's people not selling their homes, putting jobs in real estate and banking

at risk. But then there's also the what I suppose we could call the price cycle which is the effects on the balance sheets of ordinary people and what that does to consumption mm-hmm is that a fair way to describe yes yeah no I think it is. And, and, and, you know, interesting that Peter, uh, Temin, who's a, for an excellent economic historian, uh, he was one of the early that consumption fell from 1929 to 30. And it was hard to figure out why. Incomes hadn't fallen that much yet. And also, if you looked at, and he looked at wealth, okay, it was holding up fairly well. What he didn't look at is housing wealth.

Because it was taking, it was the thing that was really taking a hit. And then that became cumulative from 29 and how you know I think how new housing construction really collapsed and didn't recover till about 1935 34 35 it started to come back come back up and and so construction just went down to all to just almost nothing but But more than that, people had their balance sheets badly damaged, and they were just belt tightening all over the place. What's the relative importance of the construction bust versus the balance sheet destruction? Well, I think the balance sheet is because that affects your consumption of almost everything. Okay. Yeah.

And it's not just construction, not employment. See, because the housing industry in the U.S., it's about three or three and a half percent on average, but it's got a big, it goes from one of that from a half a percent to something like six is the kind of volatility you have. But it's a very long, you're producing something that lasts a long time, you see. So it's a very long life good. So that percentage is in terms of years of service, you see, is a lot of product. Okay. It's a lot of house service, house services, shelter services are involved. so it's uh fortunately these are rare we've had two in a little over 80 years and uh i'm not sure that we could if they were more often i'm not sure we could survive it i think it would be a big uh it would be hard to maintain our freedom. Vernon, let me ask you a couple of questions about Australia.

Now, before we began recording, I told you that we have the second highest household debt to GDP ratio in the world at around 120%, which is just behind the sui generis of switzerland uh and i showed you an article by the economist steven kakoulis who is bullish on housing and let me just quote from the article because i want to get your reaction to it so he says that australian householders balance sheets are staggeringly healthy, and his reasoning is as follows, quoting, Household debt is 190% of household disposable income. Against this, the level of household wealth in the ownership of dwellings is approximately 500% of household disposable income, even allowing for the fall in house prices between the middle of 2017 and the middle of 2019. In addition to that are so-called household financial assets,

which includes things like superannuation balances, bank deposits, direct shareholdings, and the like. The value of these assets is approximately 430% of household disposable income. This means the level of gross household wealth is around 930% of income, which quite plainly swamps the 190% of household debt. In turn, this means net household wealth, which is the sum of all assets minus all liabilities, is approximately 750% of income. End of quotation. So he argues that Australians are overly concerned about household debt. And if you put it in context, it shouldn't make us so worried.

But what do you think of his analysis there that i've just read out well i think i see you're kind of comparing asset value against your income gdp as a flow and and and that can be good but you see if if those asset prices start to come down against fixed debt, then that easily swamps the income figure. You see, that's the problem. Sure, it looks good now, but that can turn around fast. And, you know, in the chart we talked about earlier where equity falls from from what was it from about uh about 13 trillion yeah to about to about six and a half or something like that yeah that's the kind of hit that you and that took place you see from the first quarter of 2006 to the first quarter of 2008. So that's over a fairly short period, and that wipes out, you see.

You got a job, you're earning your income every year during that period, but then it's all wiped off, you see, wiped out by that drop in asset value. That's the thing, how rapidly that can disappear. So you have to really keep that in mind. Stocks and flows are different things. And it's changes in the value of the stock you see it's those changes that need to be are potential sources of loss uh loss relative to the size of current income and can easily swamp it yeah you know now vernon in 2015, you visited Australia and you very rudely and recklessly broke the cardinal rule of visiting Australia, which is to call out our housing bubble.

And I think you said Sydney and Melbourne looked like they had pretty good bubbles. But what do you make of Australia's housing situation? What do you make of this anomaly down under? Well, it's, now I haven't, you know, studied it carefully, but it looks to me like the volatility of your markets there are much greater than in the United States. That is, we have more, you know, we have these ups and downs, but they're over longer periods and fairly steady movements

in between. And if you look for the, and actually the post-war period, you see going from 1950 up to the Great Recession, it's just little ripples, really, in equity. And equity never moving enough to really swamp the income flows that are being generated year in and year out. So it just, it seems, what strikes me is that it's, there must be some stop and go. I mean, policies, I would think, you see, I don't know what, I don't keep up with the changes in policy, but it sounds to me like that there is, there's interventions that are over, that are interventions that are not slow and steady, but sharp and, and quick. You that's,

you've, that's given the jolting the system. You've guessed it correctly. You hit the nail on the head. Yeah. The, the, the cycles,

the cycles we've seen are in a regulatorily driven, except probably for the beginning of the second boom in 2012 which was well that that was the central bank cutting rates it's difficult to predict the australian housing market because it's not a closed system and people have um people have long been predicting the end of the bubble but there's a pretty ironclad consensus in the Australian political and economic establishment that house prices should not fall substantially. So every time it looks like it's teetering, regulators and governments step in to, you know, resuscitate the housing bubble.

Now, it may be exacerbated in your case by capital inflows or outflows. You see, you've got probably a more open economy in terms of exports and imports rather than this huge U.S. domestic. and that can affect, you see, the sort of thing, because the inflow, a lot of that inflow of capital may be coming into homes, and it may be volatile. And so I don't know how, to what extent, that plays a part in your market that's that's fairly minor in the u.s yeah you're referring to uh foreign buys yeah now we have you see some of our west coast markets

reflect and you see that in canada too vancouver yeah san francisco san diego some of these places there's a lot of foreign buying and but generally you see that is not large relative to the size of our markets so I've done a little bit of research on this which you might be interested to hear now i became interested in this idea because in september i had bob schiller on the podcast and he has a new book out called narrative economics and we were talking about

narratives in housing markets in the anglosphere narratives about asian buyers uh including in australia and how even if the liquidity finding its way from for example china and hong kong into australian homes is ultimately inconsequential to house prices, the narratives in and of themselves might provide rationalizations for greater domestic sentiment. And I had always believed that Chinese buyers had been pushing up prices in Sydney and Melbourne because that's what everyone said. Yeah. So, you know, the proverbial barbecue conversations.

Australians were fixated on this. But when I became interested after talking with Shilla, when I became interested in this idea of narratives as not just the outcome, but the cause of economic events, I actually did some digging on, well, how much have foreign buyers really impacted the markets here? last podcast with David Tuckett but here's a few figures I can throw at you. So the RBA, the Australia Central Bank, the Reserve Bank of Australia did a study in 2014 and they concluded that overall the available data suggests that while foreign residential purchases change a bit from year to year they have been relatively steady and fairly low as a share of turnover in the housing market in Australia and hence are unlikely to have been the main driving factor behind the recent increase in prices. Now, I've got another study which the Australian Treasury did in 2016. So they said, the increase in prices attributable to foreign investors is small when compared to the average quarterly increase in property prices of around $12,800 in Sydney

and Melbourne during the study period. Across Sydney and Melbourne, the models which we consider to be the best specified indicate that for a typical postcode, foreign demand increases prices by between $80 and $122 on average in each quarter. So this study the treasury did, on average, quarterly property prices were increasing by $12,800 in Sydney and Melbourne, but foreign demand increased prices by between $80 and $122. So isn't that interesting um and then you know just just to talk about this idea of narrative economics i found a study conducted by a uh an academic at the university of sydney dallas rogers he surveyed 900 sydney residents in 2016 and uh this is one of the questions he asked based on your understanding of sydney's housing

market what do you think determines house prices select up to three and there was a list of factors 64.4 percent of respondents picked foreign investors purchasing houses in sydney which was higher than any other category. And he asked another question. 77.9% of respondents disagreed or strongly disagreed with this statement. Foreign investment has no impact or very small impact on Greater Sydney's housing market. How interesting is that? Let me ask you, are a lot of those foreign buyers cash buyers, though? Absolutely. Yeah. Yeah. Well, you see, they're going to buy and hold, too. They're not going to be a jittery over there. They're not going to have this equity loss against the leverage loss that we've been talking about.

So they're pretty stable buyers in that sense. Yeah. Yeah, true. But I think their role is overstated in the Australian public discussion. To quote the pogo article which you tried to use as the title of your wall street journal article we have met the enemy and the enemy is us it's not the chinese buyers let's let's kind of finish where we started, which is with the Great Depression. Throughout this conversation, you've been referring to the Great Depression almost as like the cousin of the Great Recession which is enshrined in the book by Anna Schwartz and Milton Friedman, A Monetary History of the United States, is that the Federal

Reserve failed to act and that was kind of the cause of the Great Depression. But you really present a revisionist history of that period. And just give us your case defend your your argument that we should principally think of it as a housing bubble uh here's the thing basically i think the argument is is not wrong right and freemanartz. It's just that we, what we don't, in some versions of it, now Friedman and Schwartz don't actually say this, but some people have gone to the view that well, it was just really a pretty garden variety recession. But the Fed screwed up and that's what caused all the problems. Well, Friedman and Schwartz,

they're not sure how bad the depression or recession would have been. They don't talk about, they certainly don't get into the housing sources that we've been able to do since. Well, but one person that Friedman and Schwartz did very much influence and that's Ben Bernanke. Ben Bernanke was was well schooled in the data of the depression and Friedman and Schwartz. And what no one talks about is that, including Ben Bernanke

and his autobiography, because I read it, I was interested in this. He intervened in August of 2007. There was 14 months of classic Friedman and Schwartz liquidity enhancement. He was getting that right. I mean, he was getting that out right out of Friedman and Schwartz. This is the sort of thing you need to do if you don't want to let this thing snowball. It was pushing on a string. The housing market levitated. OK, it was it was very precarious, precariouslyiously levitated during that period. What we were getting was 30, 60, and they stretched them to 90-day liquidity enhancements. These were all, but just these temporary injections. And they

did no good. They weren't helping at all. Well, then it. So that's 14 months. 1415 months. It was in October 2008. That you we had really started the massive intervention. and we did the bank, the large bank bailout. Even though, you know, Sheila Baer over at the FDIC presided over nearly 400 bank failures at no cost to the taxpayers, but then she zeroed out the equity. You see, those banks, the small and medium sized banks that went under, the value of their assets in the market plus the deposit insurance, prepaid deposit insurance plus equity was enough to cover liability. So depositors were never, you see, at risk in any of those banks. And it's not at all evident that wasn't the same for the large banks. If they zeroed out the equity, it had been okay. So the bailout,

you see, of the large banks was a bailout of the stockholders, not the depositors. And that got confused. That got so many, and there's all kinds of people I think had an interest in seeing it being a little bit confused. You see, that's the thing that was a real problem. So all of those incumbent bank common stockholders got to participate in any benefit to bank earnings coming from new loans. Whereas if they had been zeroed out there, you see, then the new investors would have got all of the new returns. You see the difference? And that dilutes, you see, that dilutes.

And the same thing happened in Japan, except the mechanism was different. They just let them carry it on the books and tried to hide it. But the point is that incumbent shareholders didn't have to take a hit, and they got to share with new investors in a return on new investment. You see, that very much dilutes. If they had been out of that, that means new investment would have been much sweeter because your dollar earns all of the new return, you see. And so you would have a tendency to have a lot more investment coming in, you see.

And that's normally the way a business recovery happens. You see, we got new investors coming in and, you know, innovation is continuing. We had I grew up in Wichita. It was the home of the aircraft industry. It's loaded with innovators, you know, you know, Beechcraft, Cessna, Stearman. Those were all major new air products. The aviation, general aviation was very much centered around Wichita. And so innovation continues, but it needs money.

And you tend to have, you see, that new investment flowing in, that venture capital, you see, that's going into this. And it's venture capitalists are attracted because they get a big return on that investment. They don't have to share it with any incumbents, you see. And that is the difference. And what was so tragic, you see, about the bailout of the large banks. And see, everybody talked about, well, it's not fair and all this. Well, of course it wasn't fair. But it had this, and also, politically we overreacted. Now we want to tighten up and we want to punish the banks.

Hit them with all kinds of regulations. I would say let them go bankrupt, get new management in there and leave them alone. What better policy? In terms of reframing the principal cause of the Great Depression as a balance sheet recession caused by a housing bubble. It strikes me that a lot of authors, including especially Galbraith, Kindleberger, even Bob Schiller, focus on the land bubble in Florida in the 1920s,

zero in on that but but really it seems like there was a lot of speculative real estate activity around the country it's just that we don't have very good data sources but i know that i think there was a flat craze in chicago i think real estate in manhattan went a bit wild oh yes there was there was really a i mean there's a good argument to say that there was a housing bubble around the, yes. There was really a, I mean, there's a good argument to say that there was a housing bubble around the country. Yeah, there was. And all of our data that we got, and Steve Gerstad even got some, picked up some new sources at Ohio State University,

some that we report in that uh in that book and there's plenty of evidence that that was a nationwide yeah wide housing and yes included florida but that was just one area yeah see everyone remembers florida but everyone remembers that you see and uh but no it was much more general there's a lot We try to sweep together the evidence. And also some economic historians now who have, for example, they've been looking at housing permits. And the housing permit data is very much consistent with what you and I are talking about and what's in that book, you see, in which it was across the country things you see, the claims you heard in the Great Recession was, well, housing, you see, there's never been a national decline. These are regional phenomena. you look at the depression, the more you see these these fingerprints and handprints of the housing market causing all kinds of damaged balance sheets.

It's fascinating. And that and you see even now, Ed Lemer, see, Ed Lemer has, he's got the right model of housing. Yeah. I like his model. He didn't do well on the forecasts. Yeah. He didn't do too well on forecasts, but that's because he doesn't have in the data set. He's fitting the model to a data set that has no outliers.

It's only the post-World War II period. You see, he doesn't have in there the depression. Yeah. If he had the depression in there, then the parameters, you see, would make it more likely that it would pick up maybe a great recession. Yeah. that it would pick up that may be a great recession. So he's got the right model, but the problem is to get the parameters set right. And he's fitting it to historical data, but it doesn't even include the big one, you see.

And I don't know why that is. Part of it is it's standardization of the data. You see, the post-World War II period, people are much more comfortable with that data than trying to paste in, you see, the 20s and the 30s. But I think that's fundamentally the problem there. Yeah. the problem there. Vernon, let me share a speculative theory of mine with you. Now, as far as the Great Depression is concerned, Australia had a comparatively milder experience to the United States. The depression that was worse for us, arguably, on multiple different metrics, was a depression in the 1890s. We had a searing depression, which was the result of a fabulous

land bubble, principally in Melbourne. Australia was the richest country in the world in the late 1880s and people nicknamed Melbourne, marvelous Melbourne. It was this beautiful metropolis down under, which had the most ornate architecture and a land bubble that spread into the outer suburbs. There was also a land bubble in Sydney, which people have forgotten about, and Adelaide, but it didn't gather as much pace because there was a drought, I think, in 1887, which kind of took some of the wind out of it. But at any rate, the bubble collapsed in around 1890, 1891. Prices in Sydney and Melbourne fell by roughly 50%. And the country had a worse time of it than it did in the Great Depression of the 1930s.

Now, what's interesting to me is I think, i'm totally speculating here and i don't have a counterfactual but one reason i believe australians didn't get so out of hand with their housing bubble of the 1920s uh in contrast to their American counterparts, was they still remembered the experience of the 1890s. It was within living memories and lenders were more circumspect. Now, let me illustrate this difference with a couple of statistically insignificant anecdotes. So your leading economist at the time, Irving Fisher, who we've mentioned during this conversation, was so optimistic that on the 16th of October 1929,

he famously remarked that stock prices had reached a permanently high plateau. And of course, 13 days later, the stock market crashed. And even after, he continued to tell people that a recovery was just around the corner. And it really all but destroyed his professional reputation, not to mention the fact that I think his son estimated he might have lost about $10 million in his personal savings that were tied up in the stock market um what's interesting to me is that at least according to ed glazer the last real estate mediated financial crisis you guys had prior to the great depression

was 1857 the panic of 1857 which 185057, which was 10 years before Fisher was born. He was born in 1867. Now, compare Fisher's story with one of Australia's prominent economists at the time, Edward Shann, Shan and this is a monograph that he published in 1927 titled the boom of 1890 and now he's drawing a direct analogy and let me quote the opening paragraph because he comes out with all guns blazing so this was published in 1927 in August he, the average man who loves a gamble turns a blind eye to any likeness between the sound prosperity on the continuance of which he budgets and the booms or manias of long ago. Things are different now,

he assures you as he shakes off the warning hand on his shoulder, but common prudence bids us turn even the distasteful pages of our history. Very good. So, Shan was born in Tasmania in, I think it was 1886, and he moved to Melbourne during that terrible depression of the 1890s so he remembered that that affected him throughout his life much like perhaps your your experience of the great depression affected your view on economics and it enabled him to write this book in 1927 and he he became this celebrated and venerated oracle,

much the same way that Bob Schiller is now this genius prognosticator. So Edward Shand was our Bob Schiller in the 1930s until his untimely death in 1935. He fell out of his office window at the University of Adelaide. But it's interesting the difference between those two leading economists, one in Australia who remembered what a real estate-mediated financial crisis was like and could warn people during the 20s, and one in America who had no memory, no personal memory of what one was like

and was incredibly optimistic by comparison, which I think illustrates how you guys had forgotten and you allowed your real estate bubble of the 1920s to get much more extreme than our real estate run-up of the 1920s. And to me, it just points to this idea of the collective memory and the importance of psychology in bubbles. You know, if there's one thing that illustrates how short our financial memories are,

it's the repeated cycles of housing and stock market bubbles. Well, let me... It's true that Irving Fisher, you know, he made that prediction and got into all kinds of trouble. But what was it in 1933 or 34, it's in Econometrica, he wrote a fantastic paper, The Debt Deflation Theory of Recession. And so I'm telling you you he got busy trying to understand what was going on yeah i mean that that left a permanent mark on him and that's a great paper it is it's it's so clearly written it's it's wonderful to read yeah uh did that has that paper influenced your view? Well, it's part of what we went through.

Steve Gierstad and I, neither of us are macroeconomists. Neither of us are followers of current events and the general economy very much. We're experimentalists. Arguably, those are advantages. Yes. And so we just looked at all of this with very, some might say naive, but fresh eyes. Yeah. And I tell you, we just saw all kinds of things. We were surprised that we're more kind of part of the conventional wisdom.

Yeah. And accepted ideas. And we haven't had any reason to change them and it held up yeah and but we went through all of this literature we read the key papers you see peter temmons uh a puzzle and then yes and bernanke's papers you see are coming out there in the in in the mid 30s we went through and fried and Schwartz, we went through all of that. And I tell you, it was exciting for us, actually. And of course, we were doing it from the background

of all of our experience with markets, experiments, and particularly bubbles. We don't have any trouble believing there's bubbles out there. Because we found them so easily produced in the lab and moreover it's robust across the subjects isn't just undergraduates or graduate students it's it's uh you know it's professionals yeah and also so uh that that really made that made it fun doing that book. Okay.

Well, thank you for writing it and ensuring that for all his brilliance, the rest of us don't make the same mistake as Irving Fisher and helping us to remember why not all bubbles are created equal and housing bubbles are certainly the worst. Okay. Well, Joe, thank you very much. It's been actually a long session, but I've enjoyed it. As have I.

Thank you so much for your time, Werner. I'm forever blowing bubbles Thank you so much for listening. I hope you enjoyed that conversation as much as I did. For show notes, transcripts and links to everything discussed, you'll find those on my website, josephnoelwalker.com. That's my full name, J-O-S-E-P-H-N-O-E-L-W-A-L-K-E-R.com. If you like what we're doing,

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