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FATTENING WALL STREET — Mike Whitney reports on the rapid metamorphosis of new Fed Chair Janet Yallin into a lackey for the bankers, bond traders and brokers. The New Religious Wars Over the Environment: Joyce Nelson charts the looming confrontation between the Catholic Church and fundamentalists over climate change, extinction and GMOs; A People’s History of Mexican Constitutions: Andrew Smolski on the 200 year-long struggle of Mexico’s peasants, indigenous people and workers to secure legal rights and liberties; Spying on Black Writers: Ron Jacobs uncovers the FBI’s 50 year-long obsession with black poets, novelists and essayists; O Elephant! JoAnn Wypijewski on the grim history of circus elephants; PLUS: Jeffrey St. Clair on birds and climate change; Chris Floyd on the US as nuclear bully; Seth Sandronsky on Van Jones’s blind spot; Lee Ballinger on musicians and the State Department; and Kim Nicolini on the films of JC Chandor.
A Pointless Waste of Money

Pierce the Housing Bubble

by DEAN BAKER

Virtually the entire economics profession insisted on ignoring the housing bubble as it expanded to ever more dangerous levels. Remarkably, even after the bursting of this bubble wrecked the economy and has given us the worst downturn in 70 years, most economists are still determined to ignore the bubble.

The basic story is very simple. For a hundred years, from 1896 to 1996, nationwide house prices just tracked the overall rate of inflation. This is a very long period in a very big market. If we see a trend like this persist for a hundred years it is reasonable to expect it to continue into the future, unless something big in the fundamentals changes. And, no one has produced any evidence that passes the laugh test that anything in the fundamentals of the housing market has changed.

This means that we should expect house prices to continue to fall, with nationwide prices dropping another 15 to 20 percent to complete the process of deflating the bubble. This price decline is inevitable and in many ways desirable. I don’t know why any of us would be happy if our kids had to pay more to buy their first house.

Trying to delay this adjustment process with schemes like the homebuyers’ tax credit were a pointless waste of money. Our government got millions more people to buy homes at bubble-inflated prices, ensuring that many will lose money when they sell. That is not good policy. Trying to sustain a bubble in the housing market is like having an agricultural price support program, except it is far more costly with far less benefit.

The housing bubble did support the economy prior to the recession. We will have to find alternative sources of demand to replace the demand generated by over-valued housing.

It is actually easy for economists to think of ways to generate demand. We can have public jobs programs, we can rebuild the country’s infrastructure, we can have tax cuts oriented towards low- and middle-income people who will spend the money quickly.

We can also have the Fed be more aggressive with its monetary policy, targeting an inflation rate in the 3-4 percent range. We should also push down the value of the dollar to get our trade deficit down to a more reasonable size.

Unfortunately, all of these policies face serious political obstacles in Washington. However, the job of economists should be to explain the problem to policymakers and the public and to berate those who seek nonsense solutions like re-inflating a housing bubble.

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.