What I would suggest is that any time you get the urge to provide an economic interpretation of asset price movements, lie down until the feeling goes away.
Back to Krugman. He makes three points. One is that the profession should have recognized the housing bubble for what it was. The problem is that you are tempted to explain asset prices, not to cry "bubble." Just the other day, Krugman himself gave in to that temptation regarding gold. In fact, his rationale for high gold prices is the same as my rationale for high house prices--low real interest rates.
The problem is not in our economics stars--it is in ourselves. As Robert Heinlein once wrote, "Man is not a rational animal--he is a rationalizing animal." We are constantly trying to make the universe make sense. That facility leads us to come up with plausible explanations even when the actual correct response is a slack-jawed "WTF?"
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