Q: Will the foreclosure settlement for about $25 billion between states and the five biggest mortgage lenders strengthen the housing market?
A: The problem is that the decline in the housing market dwarfs this agreement. The total decline of the housing market has been in the trillions, and negative equity in housing, by one estimate, was about $700 billion. So this is too small to be very effective. It all helps, I suppose, but it's not big.
Q: Do you think there's a bubble forming in the U.S. stock market or in any other asset?
A: It doesn't seem to me that we're in a bubble situation as we were, say, in the 1990s. In the 1990s, there was just a general mood that we're entering a new millennium, with Internet technology and advanced technology and America soaring. It was a bubble all over the world, really. I don't know that we're in that state of confidence now.
Q: Do you think any asset bubbles are forming in China?
A: China had what looks like a bubble, but the government has taken steps against it. This is another reason not to expect bubbles so much. The stock market bubble of the 1990s and the housing bubble of the 2000s were still at a time when central bankers and government authorities believed much more in free-market efficiency than they do now. The authorities are now thinking that it's their responsibility to choke off bubbles.
Q: If you had to put all your money for the next decade in either stocks or super-safe, inflation-protected securities from the U.S. Treasury (TIPS), what would you do?
A: Stocks. They're highly priced, and they're risky, but they've had a good historic record. And last time I looked, inflation index bonds have a negative real yield.
Q: Is there any recent good book on consumer psychology or a non-econ subject that you've read?
A: Well, I like Danny Kahneman's new book, "Thinking, Fast and Slow." This reflects a psychological literature that the human mind is designed to build memories around narratives, especially human interest stories. Our mind stores memories as sequences of events with an ending. The story of the Great Depression is a story that's in our memories. Another story is the patriotic one of the greatness of our country that may resonate more at some times than at others. And when it does resonate, it encourages people to be spending and investing in an optimistic way.
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