Econo-Girl doesn't do this often, but she is going to post someone else's writing.
"Nobel Laureate Hyman Minsky points out that stability leads to instability. The more comfortable we get with a given condition or trend, the longer it will persist; and then when the trend fails, the more dramatic is the correction. The problem with long-term macroeconomic stability is that it tends to produce unstable financial arrangements. If we believe that tomorrow and next year will be the same as last week and last year, we are more willing to add debt or postpone savings for current consumption. Thus, says Minsky, the longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior. Relating this to our sandpile, the longer that a critical state builds up in an economy, or in other words, the more "fingers of instability" that are allowed to develop a connection to other fingers of instability, the greater the potential for a serious "avalanche." "
John MauldinJohn@FrontLineThoughts.com Copyright 2006 John Mauldin. All Rights Reserved
The whole article dealt with the housing market, which seems to be losing its strength, to say the least. Econo-Girl likes to judge a localized housing market by the For Sale signs. Not very high tech, but sometimes there is no replacement for shoe leather. And For Sale By Owner reveals the desperation of the overextended. I actually never saw For Sale By Owner signs until the housing market started to slow down.
So according to this analysis, the housing prices continued upward and upward annually, so people expected that they would continue to do so forever. And it was convenient to do so because that belief gave a feeling of financial prosperity. Prices in illustrious Columbia Heights in Washington, DC are being reduced, and have been for over a year now. Of course, the more people wait for lower prices, the more prices will fall. Another avalanche.