Complementing my previous comment here, I have to say that Krugman's skeptisism makes more sense since the last week.

First off, statistics of the housing market are not great, and getting worse. The current situation (the big volume drop, while prices are not going down) is certainly not the end of the story. Something will follow.

It is not a big secret that great many people recently jumped into the housing market with speculative expectations. If these expectations won't be improved by greater demand after some time, people will start make conclusions and do something.

While the housing market enjoyed growing demand just recently, that demand was admitedly fuelled by the influx of the same optimistic newcommers. It might be stupid to ask, how would the market have done without masses of newcommers. But it is very reasonable to ask, how will the market perform when the stream of newcommers will dry out?

I am getting a picture which is even less mysterious than Krugman's. I start to "appreciate" what Bush's massive tax cuts are accomplishing.

It is now easier to make money in the markets than working - you pay less taxes for the same income. The bottom line is this: Bush's tax cuts increased (perhaps purposevily) the volume of speculative markets, and the pool of market players, enormously. Yes, those tax cuts benefit not only the 0.01% most wealthy, but many others as well. The other question is, what is the proportion of the benefits across the wealth spectrum. It is pretty clear here that the top wealthy capture an obscene portion of generated wealth, while the others... Well, I fear that most of them will never exercise the equity they nominally have at this moment.

The vast volume increase in speculative markets should be well appreciated. We have millions of new markets players, lurked by an established material wealth receipe (think of the "rat race") and favourable tax regime. Then we have pension funds  and hedge funds (beside any "traditional" market players), basically specialising in market speculation. Pension funds have perhaps 40-60% of market shares of many markets, even given the volume increase. Effectivity of hedge funds must be normally depressing to other players.

Besides that, we have vastly increasing markets outside the US. Chinese were opening new brokerage
accounts at the rate of 90,000 a day just before Shanghai's "Black Tuesday". Market speculation in other economies was increasing in lesser scale naturally, but nevertheless, everyone caught the same model. That's what globalization did to the world.

It cannot be denied that most of these markets have been steadily growing. But on other hand, given a steady influx of new players... can it be hard for the markets to achieve this performance? You surely know pyramid schemes, don't you?! What is a chance that the current global econonomy is not much more but a pyramid scheme, where most of the new players -individuals and countries - are gonna be duped pretty soon? (By the way, if you like virtual game worlds as reality models, check this.)

Hence the question: how would the world  markets perform without the expansion of player's pool? After all, globalization has the limits of the globe. How the markets can be tested?

Well, there was a test last week. The Chinese government was planning to curb speculative markets more seriously, and to make growth of these markets more difficult with capital gain taxes. What is the market reaction? Shanghai tanked, New York tanked, everyone followed. Why are the world markets so sensitive to "freedom" of speculative markets? Do they badly need a few bubbles in China?! Is this why Europe is pushed "to reform" so persistently, so to put effectively all its social infrastructure into a pyramid?

I tried to read conservatice commentators at "National Review", such as Larry Kudlow. Of what little they could write, I could only affirm my suspissions. You see, raising capital gain taxes and going after speculations is a terrible thing to do. Isn't this ironic that today's economy has to be massaged so subtly by the government?

Today's world economy is dominated by ever increasing and ever expanding speculation in stock and real estate markets. Can you convince me otherwise?