NYT columnist William Cohan traces the current downturn to the decision to rescue Bear Stearns. In Mr. Cohan's view, if the government did not rescue Bears Stearns, then there would not have been a panic when Lehman collapsed and therefore we would not have double-digit unemployment today. Someone apparently forgot to tell Mr. Cohan about the housing bubble. They must have also forgot to tell him that the recession began 8 months before the collapse of Lehman Brothers. If Mr. Cohan knew about the housing bubble he would realize that double digit unemployment is being caused by the a loss of close to $500 billion in annual spending in residential construction. Builders are not building homes because the building boom caused by the housing bubble led to enormous overbuilding. Builders would be not building any more homes today if Lehman Brothers had never collapsed or never existed. It doesn't matter, there is a glut of housing. It's really simple. The other major cause of the downturn is the loss of $6 trillion in housing wealth due to the collapse of the bubble. People consume based in part on their housing wealth. Economists have known this for probably 100 years. If they lose $6 trillion in housing bubble wealth, then we should expect annual consumption to fall by between $300 billion to $400 billion. (Throw in another couple hundred billion as a result of the stock market plunge.) This drop in consumption also has nothing to do with Lehman. We should also throw in the collapse of a bubble in non-residential real estate, which cost the economy another $200 billion a year in demand and which also had nothing to do with Lehman. In short, the major causes of our current downturn have everything to with the collapse of bubbles in residential and non-residential real estate and nothing to with Lehman. Competent economic analysts saw this crisis emerging years ago. It is incredible that any serious economic analyst still cannot recognize the impact of these bubbles and even more incredible that they would have the opportunity to display their ignorance in the NYT.
--Dean Baker
