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Post by unlawflcombatnt on Aug 30, 2006 16:34:04 GMT -6
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Post by unlawflcombatnt on Feb 5, 2008 18:38:33 GMT -6
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Post by unlawflcombatnt on Jan 27, 2009 22:44:03 GMT -6
Dean Baker has written a new book about our collapsing bubble-fueled economy, titled: Plunder and Blunder: The Rise and Fall of The Bubble EconomyBelow is a review of the book by both Dean Baker and Eileen Appelbaum. " Dean Baker: The country is suffering the worst downturn since the Great Depression for a simple reason: An $8 trillion housing bubble collapsed. The leading lights of economics and finance, with very few exceptions, could not see the largest financial bubble in the history of the world. The result is soaring rates of unemployment and foreclosure, a crippled financial system, and a huge cohort of baby boomers who have seen their home equity and savings vanish and now face retirement almost totally dependent on Social Security and Medicare.
The most infuriating aspect of this disaster is that it was completely preventable. The basics of the housing bubble were straightforward. House prices began soaring in the mid-1990s, hugely outpacing the overall rate of inflation. This followed a 100-year-long trend in which nationwide house prices had just kept even with the rate of inflation.
There was no fundamentals-based explanation for the explosion of house prices on either the demand or supply side. Furthermore, there was no remotely comparable increase in rental prices. If the fundamentals of the housing market explained the run-up in house prices, then there should have been a comparable rise in rents. Instead, rents only slightly outpaced inflation in the 1990s, and inflation-adjusted rents actually fell slightly in this decade.
The huge overvaluation in house prices guaranteed trouble when prices adjusted. Homeowners consumed based on the wealth in their home. When housing prices plunged, so too did consumption. The effect of this plunge in demand has been amplified by the collapse of the huge pyramid of creative financing that grew up in the shadow of the bubble and in turn fed its growth. Ever greater levels of leverage on ever more risky loans were the path to big profits in the boom years. This was the path to bankruptcy following the bubble's collapse.
Not only did Federal Reserve Board Chairman Alan Greenspan and the other leading lights of the economic profession fail to see the $8 trillion housing bubble, they somehow failed to recognize the explosion of risky mortgages and the highly leveraged chain of finances built on top of these mortgages.
It would have been hard even for someone without regulatory authority to fail to notice the explosion of these mortgages: sub-prime went from just 8 percent of the market at the beginning of the decade to 25 percent by 2005, but the Fed chair either didn't see this increase or didn't care. As a result, instead of attacking the bubble, those in positions of authority celebrated the rise in homeownership.
Remarkably, even now, economists and policy analysts still seem determined to make housing and financial policy as though the bubble is not there. They talk about stabilizing housing prices without distinguishing between markets where the bubble is still deflating and those markets in which house prices are consistent with fundamentals.
It would be difficult to believe that our top economists can still be so incompetent, but among economic policy makers, blindly following the conventional wisdom seems to be a job requirement. Even if this policy leads to yet another disaster, those responsible are unlikely to face any serious consequences. The taxpayers, homeowners, and job losers are the ones who pay the price of the economists' mistakes.
Is there any way that economists can ever be held accountable for the quality of their policy advice? And, if they can't be held accountable, is there any reason that the public should ever take these experts seriously?.....
Eileen Appelbaum:
Dean was among the earliest economists, possibly the first, to recognize the housing bubble and sound the alarm. The economic downturn, on track to be the worst since the Depression, is due, as he argues, to the collapse of the housing and stock-market bubbles that wiped out $6 trillion and counting of housing wealth and $8 trillion of stock-market wealth. It is this, and not the mortgage mess or credit crunch that has sent the economy hurtling downward. Dean plays a leading role in providing a clear explanation of the current crisis to millions of people who are at a loss to understand how their house and retirement savings could have disappeared so quickly.
But does Dean do full justice to the role played by financial markets in contributing to the crisis that is upon us -- can the credit markets be characterized simply as a “huge pyramid of creative financing that grew up in the shadow of the bubble”? Or did global financial flows play a more central role in the unfolding drama?
A key part of the story lies in the overvalued dollar -- much beloved by the Clinton administration and then-Treasury Secretary Robert Rubin, but which sounded the death knell for much of domestic manufacturing and the good jobs this sector provided. The trade deficit went from $39.2 billion in 1992 to $379.8 billion in 2000 and continued its ascent during the Bush years, reaching a peak in 2006 at $838.3 billion -- about 5.7 percent of gross domestic product.
This constant flow of financial capital into the U.S. kept interest rates low and facilitated the easy flow of credit to households and businesses. The flood of credit and artificially low interest rates fueled the rapid growth of a financial services industry that made its money by slicing, dicing, repackaging and selling debt – mortgage-backed securities, derivatives, credit default swaps – and charging huge fees for this “service.” On the retail side of financial services, it was all about getting people into cheap-looking mortgages whether or not they could afford the house. Subprime mortgages, alt-A mortgages, liar loans and deceptive practices pushed households to assume too much debt and inflated the housing bubble.
Domestic policies alone -- the economic recovery package even in the unlikely event that it is accompanied by 21st-century regulation of U.S. financial markets -- will not be sufficient to put the economy back on a sound footing. To restore aggregate demand and full employment, the federal government would have to replace lost demand due to the loss of housing and stock-market wealth plus cover the trade deficit. Assuming the trade deficit falls to 4 percent in the recession, this would mean annual budget deficits of 8 percent of GDP.
What are the alternatives? We could join Wall Street in its frantic search for the next new thing -- a bubble to replace the ones that burst. Or we can pursue an international effort to restore balance to global trade -- a tall order because it would require rising wages in chronic-trade-surplus countries and a falling dollar in the U.S.
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