FacebookTwitterGoogle+RedditEmail

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

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

More articles by:

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

Weekend Edition
March 24, 2017
Friday - Sunday
Michael Hudson
Trump is Obama’s Legacy: Will this Break up the Democratic Party?
Eric Draitser
Donald Trump and the Triumph of White Identity Politics
Jeffrey St. Clair
Roaming Charges: Nothing Was Delivered
Paul Buhle
The CIA and the Intellectuals…Again
Andrew Levine
Ryan’s Choice
John Wight
London and the Dreary Ritual of Terrorist Attacks
Joshua Frank
Global Coal in Freefall, Tar Sands Development Drying Up
Anthony DiMaggio
Ditching the “Deep State”: The Rise of a New Conspiracy Theory in American Politics
Vijay Prashad
Inventing Enemies
Rob Urie
Boris and Natasha Visit Fantasy Island
David Rosen
Why Did Trump Target Transgender Youth?
Michael J. Sainato
Bernie Sanders’ Economic Advisor Shreds Trumponomics
Bill Willers
Volunteerism; Charisma; the Ivy League Stranglehold: a Very Brief Trilogy
Lawrence Davidson
Moral Failure at the UN
Pete Dolack
World Bank Declares Itself Above the Law
Nicola Perugini - Neve Gordon
Israel’s Human Rights Spies
Ralph Nader
Reason and Justice Address Realities
Ramzy Baroud
‘Decolonizing the Mind’: Using Hollywood Celebrities to Validate Islam
Colin Todhunter
Monsanto in India: The Sacred and the Profane
Louisa Willcox
Grizzlies Under the Endangered Species Act: How Have They Fared?
Norman Pollack
Militarization of American Fascism: Trump the Usurper
Pepe Escobar
North Korea: The Real Serious Options on the Table
Brian Cloughley
“These Things Are Done”: Eavesdropping on Trump
Carol Wolman
Trump vs the People: a Psychiatrist’s Analysis
Stanley L. Cohen
The White House . . . Denial and Cover-ups
Farhang Jahanpour
America’s Woes, Europe’s Responsibilities
Joseph Natoli
March Madness Outside the Basketball Court
Bruce Mastron
Slaughtered Arabs Don’t Count
Ayesha Khan
The Headscarf is Not an Islamic Compulsion
Ron Jacobs
Music is Love, Music is Politics
Christopher Brauchli
Prisoners as Captive Customers
M. Shadee Malaklou
An Open Letter to Duke University’s Class of 2007, About Your Open Letter to Stephen Miller
Robert Koehler
The Mosque That Disappeared
Barbara Nimri Aziz
The Gig Economy: Which Side Are You On?
Kollibri terre Sonnenblume
Marines to Kill Desert Tortoises
Max Mastellone
Seeking Left Unity Through a Definition of Progressivism
Charles R. Larson
Review: David Bellos’s “Novel of the Century: the Extraordinary Adventure of Les Misérables”
March 23, 2017
Chip Gibbons
Crusader-in-Chief: the Strange Rehabilitation of George W. Bush
Michael J. Sainato
Cybersecurity Firm That Attributed DNC Hacks to Russia May Have Fabricated Russia Hacking in Ukraine
Chuck Collins
Underwater Nation: As the Rich Thrive, the Rest of Us Sink
CJ Hopkins
The United States of Cognitive Dissonance
Howard Lisnoff
BDS, Women’s Rights, Human Rights and the Failings of Security States
Mike Whitney
Will Washington Risk WW3 to Block an Emerging EU-Russia Superstate
John Wight
Martin McGuinness: Man of War who Fought for Peace in Ireland
Linn Washington Jr.
Ryancare Wreckage
FacebookTwitterGoogle+RedditEmail