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Well, I believe the dollar bottomed months ago, and is now just in a stabilizing pattern. The universal bearishness was clearly a sign. When all four panelists on "The McLaughlin Group" including the host -- none of which are economists -- agree that the dollar is going lower, that's a sign of a sure bottom. :-)

With regard to real estate, certainly you are correct in your assessment that everybody has to live somewhere. However, much of the buying in the past twelve months in America's hot spots has been by investors looking to turn a quick profit, or earn rental income. When the market stops going up, the former investment scheme dies. And, when people are spending more per month than they can receive in rent after taxable considerations, this investment scenario also fails.

Asset bubbles are bad, for when they pop, they cause a huge loss of wealth. Now, one could argue that this wealth should never have been created in the first place, and the implosion just eliminates that excess. However, the problem with real estate versus stocks is that the dollars involved and the leverage are MUCH greater. For instance, stocks have margin requirements of at least 50%. By contrast, people today can get mortages with NO money down. Furthermore, the average home in the country is worth $250k. I guarantee you that in 2000, the average brokerage account in this nation was probably less than $25,000. As such, both the dollars and the debt involved when this bubble bursts are significantly more vast than when the tech bubble imploded.

Something that people seemed to ignore after the stock bubble burst was the component of the economy during the late 90's that was exclusively caused by this securities Ponzi. For instance, what would employment really have been without all the dollars created by the increase in securities prices? What would tax revenues have been, and, therefore, what would the budget surplus/deficit have been?

There is a fairly large part of our previous recovery that was falsely precipitated by a fallacious bull market in stocks that exaggerated economic results. Isn't the same thing happening today? How much of our current expansion is exclusively due to the explosion in real estate values, and the dollars that the consumer is spending based on the increase in their home equity? And, as our economy worsened once these stock market forces dissipated at the beginning of this decade, won't the same thing happen once the housing bubble bursts?

We're pretty much on the same page. I'm with you on the dollar. The dollar has been undergoing an adjustment since mid-2001 (against the Euro, I don't track the trade weighted index). It's so obvious at this point that virtually everyone who wants to short the dollar has long since gone short. We could see that coming from a long way off with the bubble burst and 911. That adjustment won't continue forever, so, at some point, the market starts to discount whatever macro issues are going to happen next and all the big players hand off their positions to Johnny-come-lately types.

Asset bubbles - bad, very bad. You describe the situation very well. It is the drag-along economic activity combined with the asset feeding frenzy that creates the "virtuous cycle" that IS the bubble. Ed Yardeni used to provide a very nice web site that include data on household balance sheets, debt levels, income, just about everything I could think of. He went off line for a while and I've lost track of the data. If we are really seeing speculation start to drive the real estate market then we are all in it deep.

The last data I saw on household balance sheets (a year or two ago) indicated that people were surprisingly able to afford their mortgages. My HOPE is that business investment will recover in time to take some heat off the real estate market by providing an income (GDP) source beyond the interest rate induced housing "multiplier". The thing I take some comfort in regarding real estate, versus say stocks or tulips, is that the interest rate induced activity creates permanent, valuable, hard assets. The stock market bubble was pure vapor. Billions of dollars were literally being thrown at ideas based on the religion of the day ... new economy concept. Even the massive amounts of fiber that was run by telecom companies was predicated on enormous growth from all those vapor products.

As those overextended households at the margin get squeezed out of their homes, or as those REIT's get squeezed out of their apartment / condo complexes, and as prices drop, there is a large pool of dual income families who will buy houses and soften the blow. When the stock market started down there was no bottom. The NAZ lost something like 80% of its value because it was all vapor. The key question is 'just how big is that group at the margin?'. If they're not really the margin anymore then we're in big trouble. If they are indeed the margin then I have hope that the bulk of wage earners could absorb the assets of the weak and prevent a calamitous blow out.