Economists can be an incredibly thick group when it comes to economic issues. NPR reports that Glenn Hubbard, who was formerly chief economist to President Bush, has a bailout package that would allow every homeowner in the country to refinance their mortgage at a 5.25 percent interest rate. In addition to being a very nice gift to wealthy homeowners (unless we cap the size of the mortgage), it will not solve the problem of collapsing housing bubble. The problem is that house prices are too high. Let's try that again, the problem is that house prices are too high. Economists used to believe in prices being determined by supply and demand. The bubble pushed house prices up by more than 70 percent above their trend level. There was no change in the fundamentals that justified this rise as some of us tried to argue to people like Mr. Hubbard back in 2002, 2003, 2004, 2005, and 2006. This meant that prices were being driven by speculation. The bubble was extended by the predatory mortgages in the subprime market and new exotic mortgage instruments developed in these years, but the underlying problem was house prices, not the mortgages. It is remarkable that people like Hubbard did not see the bubble back when this monster was growing. It is astounding that he still does not understand it even as its collapse is wrecking the economy. It would have been useful for NPR to seek the comments of someone who did not miss the housing bubble on this plan.
--Dean Baker
