The Housing Bubble Was No Mystery

I've not posted about the economic crash recently, although I've made references to it in other posts along the way.  Today I read a short comment on from Dean Baker at the Center for Economic and Policy Research.  He was responding to the announcement from Federal Reserve Chair Janet Yellen that there will be a new committee in the FED to study and seek to avoid another destabilizing economic crisis like the recent ones, including the Great Recession. 

Reporting on this announcement, the New York Times continues to imply the oft-reported impression that the coming of that crisis was a mystery that no one could see.  Baker's contention is that many people did see it coming, including seeing all the obvious signs of the housing bubble.  Rather than not seeing these foreboding signs, what accounts for the FED's unreadiness and lack of preventive intervention was "an extraordinary level of incompetence."  Former FED Chair Alan Greenspan himself admitted to responding wrongly to danger signs, having been blinded by a false ideology of market economic systems.

Here are Baker's remarks.

September 13, 2014
It Really Wasn't Hard to See the Dangers Posed by the Housing Bubble 

At its peak in 2006, the housing bubble had caused nationwide house prices to rise more than 70 percent above their trend level. This run-up occurred in spite of the fact that rents had not outpaced inflation and there was a record nationwide vacancy rate.

The dangers of the bubble also should have been clear. Residential construction peaked at almost 6.5 percent of GDP compared to long period average of close to 4.0 percent. The housing wealth effect had led to a consumption boom that pushed the saving rate to near zero.

Also, the flood of dubious loans was hardly a secret. The National Association of Realtors reported that nearly half of first-time homebuyers had put down zero or less on their homes in 2005. The spread of NINJA (no income, no job, and no assets) loans was a common joke in the industry.

These points are worth noting in reference to an article discussing the Fed's efforts to increase its ability to detect dangerous asset bubbles. An asset that actually poses a major threat to the economy is not hard to find. It kind of stands out, sort of like an invasion by a foreign army. The failure of the Fed to recognize the housing bubble and the dangers it posed was due to an extraordinary level of incompetence, not the inherent difficulty of the mission.