The Washington Post contributed to the housing bubble in the late 90s and first half of this decade by consistently presenting the views of housing market cheerleaders and rarely presenting the opinions of analysts who recognized the problems in the housing market. In fact, the most widely cited expert on the housing market in the Post in the years from 2003 to 2006 was David Lereah, then chief economist of the National Association of Realtors, and the author of Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them. The Post seems to be continuing its pattern of misreporting on the housing market with a three part series on the bubble. The first article today relies exclusively on the views of analysts who failed to recognize the bubble. As a result it fundamentally distorts the phenomenon. First and foremost, the article attributes the bubble to the proliferation of subprime and exotic loan instruments. in fact, the bubble preceded the surge in subprime and the development of exotic financial instruments in the housing sector. House prices had begun to diverge from their long-term trend in the mid-90s, spurred by the run-up of wealth created by the stock bubble. By 2002, real house prices had already increased by more than 30 percent. By comparison, real house prices had remained virtually flat for the century from 1895 to 1995. No economist had any plausible explanation of this run-up, which is why it was possible to recognize it as a bubble. If the Post (and the rest of the media) had allowed the views of economists who recognized the bubble into its pages, it might have mitigated the damage, as more homeowners, potential homeowners, and investors would have been warned about the dangers of a collapse of the housing market. The growth of subprime and the spread of exotic financing is characteristic of the later stages of financial bubbles. As a bubble inflates, investors no longer use sound judgment in reviewing financial assets. As long as the bubble continues to grow, sound judgment isn't necessary. Any mortgage is a good mortgage, as long as house prices keep rising 10 percent a year. While this flood of bad financing helped perpetuate the bubble and increase the damage associated with its collapse, the Post has confused cause and effect in making this the centerpiece of its analysis. In presenting the bad financing as central, the Post also effectively conceals its own culpability, along with that of the rest of the media. Prior to the collapse of the bubble, it would have been very difficult to know exactly which banks were involved in which bad practices unless inside sources were willing to come forward. However, the fact that bad lending practices were taking place on a very large scale was easily knowable and known to serious analysts of the housing market. The explosion of subprime lending alone should have been enough to warn anyone that some really bad trouble was coming. In the same vein, serious analysts knew that there were Enrons out there in the late phases of the stock bubble, even if they didn't know the identity of the Enrons (or Worldcoms or Global Crossing, etc.) Bubbles lead to bogus financing, but we only find out the specifics after the crash. The Post bizarrely describes a scenario in which Greenspan "puzzled over one piece of data a Fed employee showed him in his final weeks. A trade publication reported that the subprime mortgages had ballooned to 20 percent of all loans, triple the level of a few years earlier." If this is true, then it implies an incredible level of incompetence on Greenspan's part. The rise in subprime lending was not some obscure fact known only to a privileged few. It was a widely noted development in the housing market over the years 2003-2005. If Greenspan was just made aware of this growth as in the last month of his tenure in January of 2006, then he was incredibly negligent in performing his job. The growth in housing prices had been the central fuel of the U.S. economy in the recovery following the 2001 recession. Greenspan had been an eager proponent of housing dismissing the concerns of those who warned of a housing bubble. If he did not even know of the surge in subprime lending, then it is difficult to imagine any possible basis on which he could have ruled out the existence of a bubble in the housing market. (The article says that Greenspan "did not recall" whether he mentioned the growth in subprime lending to Bernanke. If Bernanke, did not already know about the growth in subprime, then he is not competent to be chairman of the Fed.) In short, this article does more to conceal than reveal the developments that led to the current housing crash. There were no deep mysteries that had to be uncovered. House prices had gotten badly out of line with fundamentals by 2002. This was possible for any competent analyst to recognize just as it was possible to recognize the stock bubble by 1998. Unfortunately, the Post and the rest of the media relied almost exclusively on analysts who somehow failed to recognize the housing (and stock) bubbles or worse, had a direct interest in perpetuating these bubbles. Even after the fact, the Post is still choosing to rely almost exclusively on those who failed to see the bubble, rather than the experts who foresaw and warned of the problems ahead.
--Dean Baker
