Tyler Cowen thinks about the business cycle:

No one made homeowners treat rising asset values to be the same in value as accumulated monetary savings. But many of them did. And the mechanism may be this: in private terms people treat accumulated money and rising asset values as the same. But in social and macroeconomic terms the implications of those two forms of savings are very different. In particular the social risk of saving through asset values is higher, given the correlation of market values and returns. Nor are their liquidity properties the same if everyone needs to "rush for the exits."

Insofar as you think people are tricked by "savings that aren't really there," asset values are the most likely the relevant mechanism. This idea has played a surprisingly small role in business cycle thinking over the last century, although it has been floating around since at least the 1930s.

Right now everyone in London is wondering if a real estate bubble is about to pop. Or does UK tax law, combined with greater international mobility, mean the new prices are more or less permanently high?

The UK may turn out to be a very special case. Its real estate values are largely driven by London, which has a huge fraction of the population in and around it. So far London, like New York, has resisted price declines; analysts in both places think that this may be because international demand is supporting the market.

I'm still pondering the savings question, which has certainly been folk wisdom among journalists and some analysts, but as far as I know, has never been rigorously tested. Do people in places where the bubble didn't reach, like the rust belt cities, save more than their counterparts in bubblier territory?

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