In the aftermath of the collapsed bubble, it is not reasonable to expect economic output and, in particular, the components of investment related to housing to return quickly to their previous business cycle peak levels. Because of the overinvestment during the 2000s, the U.S. economy now has high inventories of houses and commercial real estate. Given this overabundance, it will take time and economic growth before substantial amounts of new investment in houses and commercial real estate occur.

In general, 2007:Q4 should not be used as the benchmark for where the economy is supposed to be now, precisely because part of the economic activity during the previous decade was due to artificial growth driven by a bubble. A more appropriate assessment of today's economic performance would focus on underlying trend growth, thereby excluding growth caused by the bubble. To illustrate, real GDP grew at an annual rate of 2.7 percent per quarter, on average, during the 2002-07 expansion. The nonbubble trend growth rate during that period would have been lower—for instance, 2.4 percent. This is the average growth rate since the Great

Recession ended; thus, it does not include a real estate bubble. Many analyses simply compare today's economy to where it would be had it continued to grow at the higher rate. It would be more appropriate, however, to compare today's economy to one that grew steadily at the lower, nonbubble trend rate.

The latter comparison may still indicate that economic output remains below its potential, but it would not be as far below as the former would suggest. Which comparison is used has important implications for monetary policy. Moreover, policymakers must be careful not to reinflate the bubble because, as we have seen, such growth is not sustainable and can lead to poor economic outcomes upon its collapse.