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Home Publications Blogs Beat the Press Economists Still Have Not Heard of the Housing Bubble

Economists Still Have Not Heard of the Housing Bubble

Wednesday, 28 July 2010 06:12

It is incredible that economists and economic reporters still focus on consumer confidence. Consumers are actually spending at a relatively high rate. (The savings rate is well below historic levels.) The problem is that they lost $8 trillion in housing wealth. The housing wealth effect on consumption is something that economists have known about for more than 60 years. It's too bad that they seem to have forgotten and so have the reporters who cover this issue.

The problem is not confidence. It is a lack of money. That is why consumers are not spending more and will not anytime soon regardless of how happy they are.

Comments (9)Add Comment
written by izzatzo, July 28, 2010 7:11
Confident that consumers are unconfident due to uncertainty, economists reported that uncertain consumers would become certain if consumers consumed even more and saved less than they do now.

When asked how consumers could consume more with no more income, economists responded that since consumers who are millionaires can be unconfident, it is also possible for consumers with no job, no savings, no access to credit and drowning in debt to be uncertain in decisions whether to buy a Lexus or Mercedes to live in rather than be homeless.
where should aggregate demad be?
written by scott, July 28, 2010 8:54
I've heard no economist address the issue that they all are seeking a return to the economy of 05 and 06. Let's see, that was an economy driven on debt, fantasies of value and illusions.

If only we could get consumer spending back to those levels? Hello, that is unsustainable and irresponsible. Very little time or analysis has been shown on figuring what aggregate demand would look like at various levels of savings and the like. What is the new normal, what should it be.

Of course this correction fights against the expectations and overcapacity sure as inertia affects physical course corrections. But, we've seen very little numerical analysis.

I haven't visited as consistently lately, you Dr Baker have discussed this. I haven't seen any offering of your analysis, generally you respond to articles with a few points dropped in. I prefer, in someways your articles in CounterPunch where you develop and make points, rather than refutations.
written by pete, July 28, 2010 11:35
If it was a bubble there was no wealth....can't lose something you never had. Either it was a bubble, which means people buying based on on the assumption price will rise for no good reason, or it was not a bubble, and there really was $8T there for a fleeting moment. But you can't have it both ways. Bursting bubbles should not have wealth effects.
Bubbles can affect spending when combined with creative financing
written by Hospital Administrator, July 28, 2010 12:02
While I do understand your argument, the thing that allowed people to spend more freely during the bubble days was the creative financing that was (and to some degree still is) going on. Without it, I would agree that the bubble would have caused little to no change in spending habits.
If you hold an asset who's value has been temporarily overinflated (like a house) and the financial industry creates easy ways to tap into this over valuation (via home equity lines, cash out refinancing, etc) then some of these people will spend more than they normally would. Once these assets return to a historically more normal level, these types of funding sources dry up, causing spending to decline.
written by pete, July 28, 2010 2:11
There is probably a chasm between "overinflated" and "bubble", which requires knowingly trading something which is overvalued. In other words, if I buy a house genuinely believing it will rise 10% per year, and pay too much for it as a result, that is not a bubble, just idiocy. Even putting that chasm aside, I doubt that there was $8T in unfinanced housing wealth whether real (overinflated) or bubblicious, which has disappeared in 3 years.
Two faces
written by Gerry Flaychy, July 28, 2010 4:08
A 'lack' of global money to buy, also means an 'excess' of global asking price. This is a problem with two faces. One is relative to the other.
This is not a lack but a relative lack.
written by vorpal, July 28, 2010 4:45
Reporters like to talk about how people feel.
A) Reporters can't think their way out of a paper bag
B) The like to show how "connected" to the "average Joe" they are.
written by bobbyp, July 29, 2010 7:20
If every economist who missed the bubble would send me only $1 per month, my housing crisis would end, and my confidence would be restored.
...some hours of work, more hours of leisure.
written by Scott ffolliott, July 29, 2010 8:27
"Let's just speak of using the incredible wealth of the earth for human beings, Give people what they need: food, medicine, clean air, pure water, trees and grass, pleasant homes to live in, some hours of work, more hours of leisure."- Howard Zinn

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.