Mark Trahant: America's cycles of boom and bust

Monday, April 9, 2007  

"What if housing prices decline by 20 percent? That would solve Seattle's affordability problem, right? Most folks would say this is impossible. The data from last week show that house prices keep increasing no matter what. Our boom continues, just slower and steadier. But both our region and our country have boom and bust cycles as predictable as weather. It's as much of our history as innovation, military might or baseball. One minute we're panning gold, the next we're trying to recoup our investment in those nifty machines that pluck gold dust from stream beds.

Last week Richard Fisher, president of the Federal Reserve Bank of Dallas, described some "not-terribly-ancient history."

When oil prices hit $80 a barrel in what would be today's dollars, the euphoria led to a Texas credit bubble.

"In pursuit of a seemingly sure thing, more than 550 new banks were chartered in Texas from 1980 through 1985. This made for a volatile brew, combining dramatic rates of growth in activity with a dramatic expansion of the number of players with limited experience in navigating a reversal of fate, or what econometricians call a reversion to the mean," Fisher said. "The assumption of permanently high -- or permanently rising -- prices in an asset class -- in this case, oil -- invariably leads to regrettable decisions."

The regrettable decisions piled up. After oil prices fell, "Bank and thrift failures reached a frightful magnitude," Fisher said. "More than 800 financial institutions went out of business in Texas during the 1980s and into the early 1990s. Nine of the 10 largest banking organizations based in Texas didn't make it.""

Get the Story:
America defined by boom and bust (The Seattle Post-Intelligencer 4/8)

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