Thursday, March 5, 2009

Putting the brakes on bubbles

Newsweek has an interesting article on how bubbles might form and how we might go about stopping, or slowing them, in the future. For example, adjusting the amount required for a house down payment based upon the aggregate price to rental index. The price to rental index is a bit like a PE ratio for houses. When this index is higher, you would have to put in more equity. This would reduce the feedback loop that exists right now that basically allows you to borrow more and more as asset prices get higher and higher.

On a related note, in the same issue, Warren Buffet pontificates on the evils of leverage, and how houses are for living in, not speculating on. A nice article, but after reading it I felt like I was being scolded by a wise uncle after I had gone out on a bender and woken up with a bad hangover.