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2 - Goods and Services Markets versus Asset Markets

Published online by Cambridge University Press:  05 June 2014

Steven D. Gjerstad  and
Vernon L. Smith
Steven D. Gjerstad
Affiliation:
Chapman University, California
Vernon L. Smith
Affiliation:
Chapman University, California
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Summary

Cassano agreed to meet with all the big Wall Street firms and discuss the logic of their deals – to investigate how a bunch of shaky loans could be transformed into AAA-rated bonds. Together with [Eugene] Park and a few others, Cassano set out on a series of meetings with Morgan Stanley, Goldman Sachs, and the rest – all of whom argued how unlikely it was for housing prices to fall all at once. “They all said the same thing,” says one of the traders present. “They’d go back to historical real-estate prices over 60 years and say they had never fallen all at once.”

– Michael Lewis, Vanity Fair, July 2009

It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though…

– Ben Bernanke, CNBC Interview, July 1, 2005

Two Types of Markets: The Good and the Sometimes Ugly

This chapter summarizes findings from two distinct types of experimental markets that are directly relevant to understanding the sources of both stability and instability in the macroeconomy: (1) the class of nondurable consumed goods and services that constitute about 75 percent of U.S. private expenditures (i.e., GDP minus government expenditures); and (2) asset markets, particularly those in which the items traded have long lives and whose market value, therefore, may be importantly influenced by the future price expectations of the participants (prominent examples include houses, securities, and commercial real estate). The parallels between the laboratory and the economy in each of these two cases suggest underlying modes and principles of human behavior that are similar – conditional on the differing characteristics of the items being traded in these two broad categories of economic activity.

Type
Chapter
Information
Rethinking Housing Bubbles
The Role of Household and Bank Balance Sheets in Modeling Economic Cycles
 , pp. 20 - 48
Publisher: Cambridge University Press
Print publication year: 2014

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