The trade deficit/capital surplus had nothing to do with the housing bubble. PERIOD.
What institution controls the money supply? The Fed. What was the Fed doing just before the housing market collapse? Tightening the money supply right when the demand for money was increasing. As Arthur writes in: Amazon.com: Return to Prosperity: How America Can Regain Its Economic Superpower Status (9781439159927): Arthur B. Laffer, Stephen Moore: Books
In early 2007 things started changing. First there was a resurgence of real GDP growth in the second and third quarters, meaning the growth rate in the transactions demand for money stopped declining. Second, the ninety-one day T-bill leveled off and started to fall, leading to a huge increase in the speculative demand for money. The monetary base, however, did not grow at all. What happened was money become scarcer and scarcer. And when you combine this increase in the demand for money with the Fed’s tight monetary policy over a long period of time, something’s going to happen that will trigger a financial collapse.
The housing market collapse triggered a liquidity crisis, as Arthur characterizes, “of world-class proportion.”
The housing market bubble was created by ignorant lending practices forced on banks by the government in its efforts for affordable housing and exacerbated by the actions of Freddie and Fannie. This was pushed primarily by the Democrats, but the Republicans caught the fever also. When those at Treasury and the Fed and in the Bush administration started warning about the dangers of Freddie and Fannie and the need for new regulations to restrict Freddie and Fannie, they were all demonized by the Democrats on the House Banking Committee, most notably by Franks, Dodd, and Waters. As I have already posted and reposted:
That by itself would not have been a problem, but it was a contributing factor which was made much worse by the efforts for affordable housing, the Community Reinvestment Act, the willful ignorance and ideology of Franks, Waters, and Dodd on the House Banking Committee, and the corruption at Freddie and Fannie. Check these out for a better understanding of why the housing bubble burst:
YouTube - ‪McCain's Early Recognition of Fannie/Freddie Crisis‬‏
YouTube - ‪Barney Frank in 2005: What Housing Bubble?‬‏
YouTube - ‪Shocking Video Unearthed Democrats in their own words Covering up the Fannie Mae, Freddie Mac Scam that caused our Economic Crisis‬‏
YouTube - ‪EVIDENCE FOUND!!! Clinton administration's "BANK AFFIRMATIVE ACTION" They forced banks to make BAD LOANS and ACORN and Obama's tie to all of it!!!‬‏
And especially: FORA.tv - Thomas Sowell: The Housing Boom and Bust
The evidence I presented above actually has a direct causal relationship with the housing market collapse and the financial meltdown. Your silly theory about trade deficits does not.”
I also quoted in full Thomas Sowell’s column The Housing Boom and Bust
The Housing Boom and Bust - Thomas Sowell - Townhall Conservative
Here I will only include the so-called money quotes:
Because banks are regulated by various agencies of the federal government, it was easy to pressure them to lend to people that they would not otherwise lend to-- namely, people with lower incomes, poorer credit ratings and little or no money for a conventional down payment of 20 percent of the price of a house.
Banks whose mortgage loan approval rates for "the underserved population" did not match the prevailing preconceptions found that they could not get government regulatory agencies to approve their business decisions on opening new branches or enlarging their financial operations, the way competing banks did when those competing banks met the lending quotas set by the government.
Riskier mortgage lending practices, imposed by government, were what set the stage for many mortgage payments to stop and thus for the financial disasters that followed.
Now, reread the Sowell article you linked to. Do you see any connections? Probably not.
That is plan garbage. You believe that data only comes in the form of graphs, charts, or tables and that it cannot be presented through exposition. You present charts and graphs that do not support your claims and often have no direct causal connection or relationship to the argument you are making and believe you have presented relevant data. Paul Krugman is usually wrong, while Sowell is rarely, not only with the data but with the analysis and conclusions he makes.Why can't I take Sowell serious? A google image search of him and Paul Krugman yield different results. Krugmans search comes up with mounds of economic data. Sowells search ... well I posted the only data that came up. Sad.