Williamson writes

Here’s an idea that struck me in class last Thursday. There are basically two ways to think about financial crises, or the process by which financial factors affect aggregate economic activity. The first is indeterminacy.  . .

The second process potentially driving a financial crisis is amplification – the idea that financial factors can amplify a small shock to the economy and make it a big one. . .

What struck me is that my idea of what the real estate bubble was and Jim Bullard’s view are quite different. My view is that the bubble was about amplification.  . .

Bullard’s view is essentially indeterminacy. The real estate bubble was a self-fulfilling good equilibrium, and now we’re in a bad one.

The two views get us to the same place. I.e. potential GDP is much smaller than the Old Keynesians are telling us. What you see may be what you get. However, the policy conclusions implied by each view could be quite different.

If I may be so bold, the problem with both these views is that their end point is sharply at odds with reality.

Ignore any theory about the crisis or equilibrium and simply walk step-by-step through the elements of the current economy that is different from the one in 2006.

Is there some element of the economy that you can point to and say – this was supported in 2006, is not supported now and the resources cannot be repurposed.

To my knowledge the only elements are fairly minor

The biggest difference seems to be that it will be hard to support as much owner-occupied housing, which in turn will result in a higher rental stock, which is inefficient to operate with single-family homes.

However, to reorient the total stock towards multi-family is not that difficult. You just build almost no single family and a bunch of multi-family for a few years and the mix will have shifted back.

Now, what you do see is that consumption will be more expensive without the collateral coming from single family homes, because it will be difficult to hold down inflation in emerging markets in general and China in particular.

However, production in the United States doesn’t look to be changed in any way that is significant.