The Housing Bubble and the Washington Crew

by DEAN BAKER

Alan Greenspan, Ben Bernanke and the rest of the crew running economic policy somehow could not see the housing bubble as it grew to more than $8 trillion. It really should have been hard to miss. Nationwide house prices had just tracked overall inflation for 100 years from 1895 to 1995. Suddenly in 1995, coinciding with the stock bubble, house prices began to hugely outpace the overall rate of inflation.

There was no explanation for this run-up in house prices on either the supply or demand side of the housing market. Furthermore, there was no unusual increase in rents, providing further confirmation that fundamentals were not behind the increase in house prices. Finally, in contrast to a story of housing shortages driving up house prices, vacancy rates were at record levels.

But the super-sleuths at the Fed, Treasury and other centers of decision-making just could not see the bubble. They couldn’t even see the flood of bogus mortgages being spit out by the millions and packaged into mortgage-backed securities and more complex instruments.

As a result of this astounding incompetence, we are now living through the worst downturn since the Great Depression. Because Greenspan and Bernanke and the rest messed up, tens of millions of workers are out of work. Close to one in four mortgages are underwater and the baby boom cohort has seen much of its wealth destroyed as they reach the edge of retirement. In short, as Joe Biden would say, this was a f***ing big mistake.

Remarkably, the folks in charge seem to have learned zip. They still have no clue about the housing bubble. How else can anyone explain the Obama Administration’s latest proposal for helping out underwater homeowners?

If the point is to help homeowners then there are two incredibly simple questions that must be asked:

Are homeowners paying less under the plan than they would to rent the same place?
Are homeowners going to end up with equity in their home?
These are the key questions, because if we can’t answer "yes" to at least one of them, then we are not helping homeowners. If we can’t answer "yes" to at least one of these questions, then taxpayer dollars being put into the program are helping banks, not homeowners.

Unfortunately, it seems no one in the Obama Administration has yet been told about the housing bubble. There is no evidence that they ever considered these questions in designing the latest policy to “help” homeowners.

The program will potentially pay banks and loan servicers up to $12 billion to write off principle on mortgages. In exchange, the government will guarantee new mortgages through the Federal Housing Authority (FHA). Those familiar with the housing market will note that house prices are still falling and must fall by close to 15 percent to get back to their long-term trend. If house prices continue to fall, then the vast majority of the homeowners that take part in this program are likely to never accrue any equity in their home.

Furthermore, the FHA is likely to incur substantial losses on these loan guarantees, as homeowners will again find themselves underwater and many will be unable to pay off their mortgages when they sell their home. Because the FHA hugely expanded its role in the housing market in the last two years, without paying attention to falling prices, it now is below its minimum capital requirement. It will suffer additional losses and fall further below its capital requirements as a result of this program. By the way, the losses to the FHA and the taxpayers are money in the pockets of the banks, but no reason to mention that detail.

For anyone who can see an $8 trillion housing bubble, this is all as clear as day. There is nothing complex about a story in which the government buys banks out of bad mortgages. But the Washington policymakers could not see an $8 trillion housing bubble before it wrecked the economy and apparently still haven’t noticed it even after the fact.

It’s great to know that there are good-paying jobs for people with no discernible skills. But do those jobs have to involve running the economy?

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.

 

WORDS THAT STICK

Like What You’ve Read? Support CounterPunch
Weekend Edition
August 28-30, 2015
Jeffrey St. Clair
Long Time Coming, Long Time Gone
Mike Whitney
Looting Made Easy: the $2 Trillion Buyback Binge
Randy Blazak
Donald Trump is the New Face of White Supremacy
Alan Nasser
The Myth of the Middle Class: Have Most Americans Always Been Poor?
Rob Urie
Wall Street and the Cycle of Crises
Andrew Levine
Viva Trump?
Ismael Hossein-Zadeh
Behind the Congressional Disagreements Over the Iran Nuclear Deal
Lawrence Ware – Marcus T. McCullough
I Won’t Say Amen: Three Black Christian Clichés That Must Go
Evan Jones
Zionism in Britain: a Neglected Chronicle
John Wight
Learning About the Migration Crisis From Ancient Rome
Andre Vltchek
Lebanon – What if it Fell?
Charles Pierson
How the US and the WTO Crushed India’s Subsidies for Solar Energy
Robert Fantina
Hillary Clinton, Palestine and the Long View
Ben Burgis
Gore Vidal Was Right: What Best of Enemies Leaves Out
Suzanne Gordon
How Vets May Suffer From McCain’s Latest Captivity
Robert Sandels - Nelson P. Valdés
The Cuban Adjustment Act: the Other Immigration Mess
Uri Avnery
The Molten Three: Israel’s Aborted Strike on Iran
John Stanton
Israel’s JINSA Earns Return on Investment: 190 Americans Admirals and Generals Oppose Iran Deal
Bill Yousman
The Fire This Time: Ta-Nehisi Coates’s “Between the World and Me”
Scott Parkin
Katrina Plus Ten: Climate Justice in Action
Michael Welton
The Conversable World: Finding a Compass in Post-9/11 Times
Brian Cloughley
Don’t be Black in America
Kent Paterson
In Search of the Great New Mexico Chile Pepper in a Post-NAFTA Era
Binoy Kampmark
Live Death on Air: The Killings at WDBJ
Gui Rochat
The Guise of American Democracy
Emma Scully
Vultures Over Puerto Rico: the Financial Implications of Dependency
Chuck Churchill
Is “White Skin Privilege” the Key to Understanding Racism?
Kathleen Wallace
The Id(iots) Emerge
Andrew Stewart
Zionist Hip-Hop: a Critical Look at Matisyahu
Gregg Shotwell
The Fate of the UAW: Study, Aim, Fire
Halyna Mokrushyna
Decentralization Reform in Ukraine
Norman Pollack
World Capitalism, a Basket Case: A Layman’s View
Sarah Lazare
Listening to Iraq
John Laforge
NSP/Xcel Energy Falsified Welding Test Documents on Rad Waste Casks
Wendell G Bradley
Drilling for Wattenberg Oil is Not Profitable
Joy First
Wisconsin Walk for Peace and Justice: Nine Arrested at Volk Field
Mel Gurtov
China’s Insecurity
Mateo Pimentel
An Operator’s Guide to Trump’s Racism
Yves Engler
Harper Conservatives and Abuse of Power
Michael Dickinson
Police Guns of Brixton: Another Unarmed Black Shot by London Cops
Ron Jacobs
Daydream Sunset: a Playlist
Charles R. Larson
The Beginning of the Poppy Wars: Amitav Ghosh’s “Flood of Fire”
David Yearsley
A Rising Star Over a Dark Forest
August 27, 2015
Sam Husseini
Foreign Policy, Sanders-Style: Backing Saudi Intervention
Brad Evans – Henry A. Giroux
Self-Plagiarism and the Politics of Character Assassination: the Case of Zygmunt Bauman