Alan Blinder lists six policy errors that worsened the impact of the collapse of the housing bubble in his NYT column today. Missing from his list is the housing bubble itself. We seem to live in some bizarro economic world where even now no one can bring themselves to talk directly about the housing bubble. This comes up in a wide range of contexts. For example, in discussions of plans to stabilize house prices, for some reason no one ever bothers to distinguish between the bubble and the non-bubble markets. Is there a public interest in keeping house prices from spiraling downward indefinitely? I would say yes. Is there a public interest in trying to house prices over-valued at bubble-inflated levels? I would argue strongly against that one. Remarkably, apart from me almost no one even notes that this can be an issue. Blinder's list of six items is a good one, but none of these would have mattered anywhere near as much if we had a Fed chair who actively warned against the bubble. If Greenspan had devoted his personal efforts and the Fed's research capacities towards explaining to the financial industry and the general public that there was a housing bubble it is difficult to believe that the warnings would not have had an impact. This view is widely ignored by economists -- almost all of whom were unable to see the bubble. Track records do not count for much in economics.
--Dean Baker