When is a market bubble not a bubble?

In one of the defining sequences of The Big Short, a film about the 2007-08 financial crisis, a team of hedge fund managers go to Florida. They meet a pair of sleazy mortgage brokers who reveal how the US housing market is propped up by subprime loans to strippers, people with no job or income and immigrants who do not understand the paperwork. One of the managers calls up his trader and declares: “Hey, there’s a bubble.”

The film, based on the Michael Lewis book of the same name, goes on to track how a small group of investors make billions by betting against the market as the bubble bursts, causing disaster across the global financial system and triggering one of the worst recessions in modern history.

It lays out what has become the standard story of the crisis: new financial instruments allowed speculators and low-income households to go on a wild borrowing binge, inflating an almighty boom in the US housing market, which then collapsed to devastating effect.

It is a powerful tale. But is it true? According to new research by economists including Gabriel Chodorow-Reich of Harvard University, it is not necessarily a full description of what happened. Looking back on 2007-08 with what they call “2020 hindsight”, Chodorow-Reich and his colleagues suggest that while speculative excess was certainly important, at least some of the US housing market’s rise was rooted in economic fundamentals.

Their main line of evidence is rather simple: US house prices have more than bounced back from their 2007-08 crash to reach new highs. Where the Case-Shiller US national house price index peaked in July 2006 at 184.6, it stands today at 260.9.

“The 2000s housing cycle was not a boom-bust,” says Chodorow-Reich, “but rather a boom-bust-rebound”. If the price levels of 2007 were speculative and irrational, but housing markets quickly regain and surpass them, it raises a question about just how irrational the prices in 2007 really were.

This pattern of boom-bust-rebound is repeated in some other famous bubbles. As the Nobel-prize winning economist Robert Shiller once noted, history does not generally support the idea of bubbles that catastrophically and irrevocably burst. “Though the abrupt ends of stock market booms in 1929, 2000 and 2007 might seem consonant with such a metaphor, these booms were reflated again before long, [in] 1933-37, 2003-2007, and 2009-present respectively,” he said.

Today, the shares of US technology companies, which have reshaped the global economy in the past three decades, trade at lofty new peaks. Apple is valued at $2.6tn; Microsoft at $2.7tn. Relatively young companies have reached eye-watering valuations — Tesla trades at 20 times sales — and online traders have driven the price of so-called “meme stocks”, such as video game retailer Gamestop, to the moon and back again. The gains have encouraged investors everywhere, including in the UK, to put more money into tech.

They have also prompted some…