The Slow Motion Train Wreck

This is the first posting as a TAP blog, so I thought I would mark the occasion with a comment on the housing bubble. We have enough data at this point (lower sales, rising inventories, falling median prices) that I feel confident in saying that the crash has begun. We don't yet know the speed of the decline or the full repercussions in terms of the financial havoc or the extent of the economic downturn.

Of course, the housing crash, like the stock crash, was entirely predictable. Housing prices had never risen like this in the past and NO ONE has identified anything that made the period after 1996 different from the period prior to 1996. The press can be given a bit of a pass on this one ?- as with the stock bubble, most of the blame lies with my profession. In both cases, economists were more worried about the possibility that we might have to raise Social Security taxes in 50 years or tariffs on imported shirts, than trillions of dollars of paper wealth disappearing with the collapse of a financial bubble.

If the misreporting can be blamed on economists, reporters still should be held accountable after the fact. Maybe they should ask their informed sources why they missed the housing bubble? I don't recall any pieces in which frequently cited experts were asked how they missed the stock bubble. Let's hope they can fill the gap this time.

Seriously, financial bubbles can have an enormous impact on the economy, as Japan has demonstrated over the last 15 years. Most economists like to pretend bubbles don't exist. The fact is that they do exist, and any economist who can't recognize a multi-trillion dollar bubble staring them in the face does not deserve to be taken seriously.

One final point: the crash of the housing bubble will not be pretty. Millions of people stand to lose their home and/or their life savings. However, it was inevitable. The bubble created a fantasy world that could not continue. At the peak of the bubble, 160,000 people a week were buying a home, most at bubble inflated prices. The longer the bubble persists, the larger the group of people who paid way too much for their home. While it is not good that so many dreams had to be ruined, the number will be even larger if the bubble deflates slowly. So I make no apologies about hoping for the hasty demise of the housing bubble.

--Dean Baker

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