Delusions on Both Sides

Both Cato @ Liberty and Paul Krugman blame the housing bubble on land-use regulation. The correlation is highly suggestive, although I'm not sure why such regulation should encourage bubbles in addition to raising prices generally. Unfortunately, neither piece provides a causative model which would predict bubbling. Any thoughts on this?

I share your skepticism, and Bob Shiller shares it as well. A bubble is temporary, while land-use regulation ought to permanently raise the cost of housing in some areas. A permanent increase in price is not a bubble.

It has been claimed that government funding and direction of scientific research might be a net negative for science, once you take in to account the displacement of our best researchers into government directed programs.

A description of the conditions of research at the JPL.

I wonder if there is also a displacement effect at work with regulation. How much of the time and energy that businesses spend complying with sarbox and the rest is not just a waste, but also detracting from more reliable accounting and reporting?

Surely the private sector had its delusions, but at least in credit ratings for individuals and auto-insurance regulation for individuals, the government's actions tend to reduce accountability by requiring that rating agencies ignore old events.

One could argue the market for securitized debt shows the same information asymmetry effects as Akerlof's used cars and lemons.

More to the point on the how it is the government's fault. The credit scores and credit ratings were used as regulatory tools that made markets very nontransparent.

Low downs don't trigger bubbles though, only making loans borrowers have no capacity to repay does that.

The other delusion in the derivatives market is the use of flawed pricing models that do not properly evaluate risk, as Nassim Taleb and others have pointed out. See e.g. "http://www.edge.org/discourse/fourth_quadrant.html"