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.

Attacking Health Care, Medicare, Social Security: Class Warfare Waged by the Wealthy

Dean Baker reiterates two of his key ideas in this critique of a recent article full of poor analysis of the economy, published in a major newspaper.  First, the high cost of health care is the major cause of the deficit and a major contributor to economic problems for most Americans.  Second, the political struggle over who gets the most financial benefits from government economic policies is not a philosophical debate--it is a political war waged by lobbyists trying to allow a very small group of citizens to keep more of their wealth at the cost of the rest of us.  It is not philosophical.  It is class warfare waged by the wealthy.

It is also worth noting that, at least in the U.S. case, the projected long-term budget problem is due to our broken health care system. If our per person health care costs were comparable to those in any other country then we would be looking at long-term budget surpluses, not deficits.

While the health care industry is incredibly powerful in the United States, making cost reductions difficult, it is in principle possible to open the sector to trade, which would allow people in the United States to take advantage of the more efficient health care systems in other countries. Unfortunately the NYT and most other major media are such hardcore protectionists when it comes to the health care industry, they do not allow the topic of freer trade in health care to even be discussed.

Finally, this piece tell us that at its core this debate is about philosophy:

“Everywhere, though, the debate is about much more than just partisan advantage or the next election. It is a philosophical debate.”

The only evidence for this assertion is a quote from Republican Senate leader Mitch McConnell. There is nothing obvious philosophical about this debate. The issue is whether we are going to cut benefits like Social Security and Medicare that the overwhelming majority of the working population depends upon now or expects to in the future. The protection of these programs is supported by large majorities of every demographic and ideological group. Even large majorities of self-identified conservatives and Tea Party supporters are opposed to cuts in these programs in poll after poll.

Of course paying for the programs will require some amount of additional tax revenue (presumably mostly from upper income taxpayers) and also restructuring of the health care system in ways that will hurt the incomes of insurers, drug companies, medical instrument manufacturers, and doctors. These powerful interest groups will fight the effort to reduce their incomes in any way they can.

Since they are a small minority of the population it is understandable that they would want to confuse matters by turning this into a debate over philosophy. However there is nothing obviously philosophical about whether we should pay more than necessary for prescription drugs and medical equipment so that some people can get very rich.

Bailout 7: Cheering on the Road to Destruction

When we think about the economic situation we find ourselves in, it is amazing that so few people had noticed that it was coming. Certainly there were people concerned about sub-prime mortgages, and now and then someone would suggest there was a "housing bubble." People debated whether the stock market was on a long downward trend or just a temporary decline. Many predicted a rosy future as economic skittishness passed on by and people got back to spending more money than they have.

A viral video showed up this week with clips of business news programs in which various analysts discussed the direction of the economy in 2006 and 2007. The theme of these clips was a certain analyst named Peter Schiff who was predicting a severe recession because of the inflated prices of homes and stocks. He said a long and serious recession was about to come. He said to stay away from financial stocks because these companies were not making any money. He said that people would see their assets dissolving as "paper wealth" went back up into thin air. They would respond by stopping their spending and borrowing and starting to save money to make up for the lost paper wealth they thought they had in their overpriced homes. He said it would not be merely a subprime mortgage problem, but most of the housing market would crash, people would default in record numbers, unemployment would soar, and credit would dry up.

All the while, these clips show business reporters recommending people buy stock in Merrill Lynch ("an astonishingly well-run company"), Washington Mutual, Goldman Sachs, and even Bear Stearns. They continually laughed at Peter Schiff's claims that these companies were terrible investments which would soon crash because they have no real earnings.

Well, we don't know if he got everything right about what was coming, but one thing is clear. There were people who could see this crising coming, and there were people wearing rosy tinted glasses who insisted that every day things would gett better and better. Much like the dot.com bubble and crash, they were operating in what seems now to be a kind of hysteria, mutually reinforcing one another's willful ignorance. They were not reporters, but promoters of borrowing and spending, without concern for saving money. It was very poor wishful thinking, and perhaps even for some, a kind of dissembling.