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NPR Still Doesn't Know About the Housing Bubble

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Friday, 05 August 2011 04:42

Morning Edition had a segment on the current turmoil in financial markets in which it asserted that the United States still has not recovered from the effects of the financial crisis. This is not true.

The economy is not in any obvious way suffering from the effects of the financial crisis. Potential homebuyers have little difficulty getting mortgages. We know this because the Mortgage Banker Association's mortgage application index has not been rising. This index measures applications, not mortgages. If otherwise qualified buyers were being turned down by banks, they would have to put in multiple applications to get a single mortgage. This is not happening.

The real and nominal interest rates on corporate bonds are at extraordinarily low levels indicating that larger firms have no difficulty getting capital. The National Association of Independent Businesses, which consists of smaller businesses, has fielding a monthly survey for more than a quarter century that asks its members what are its biggest problems. Very few cite the availability or cost of finance, indicating that small business does not finance as a problem either.

The economy's weakness is easily explained by the collapse of the housing bubble. The overbuilding of the bubble years led to enormous oversupply of housing and most type of non-residential structures. Therefore construction is hugely depressed. Similarly, the loss of close to $8 trillion in housing wealth is leading to predictable drop in consumption. The bubble wealth pushed the saving rate close to zero. It is now rising back to its normal level of close to 8 percent.

In short, the fallout from the collapse of the bubble easily explains the economy's weakness. It is not clear why NPR is telling its listeners that the problem is the financial crisis.

Comments (4)Add Comment
Bulldozer Solution?
written by Paul, August 05, 2011 9:53
Obviously the inventory of unsold houses needs to be reduced and fast in order for the market to recover. But 30-50 year old foreclosed houses are a drag on the market and being vacant they are damaging neighborhoods.

Like FDR in the 1930s, the federal government should bring out the bulldozers and demolish these derelicts which would also be a valuable jobs program.
The Debt Ceiling Debate, Global Crisis, and Savage Austerity
written by Raymond Lotta, August 05, 2011 1:11
For a Marxist analysis of the debt ceiling debate and the global economic crisis, I encourage you to read my interview:
http://revcom.us/a/241/raymond...te-en.html
Comments are welcomed.
The Debt Ceiling Debate, Global Crisis, and Savage Austerity
written by Raymond Lotta, August 05, 2011 1:13
For a Marxist analysis of the debt ceiling debate and the global economic crisis, see my interview at
http://revcom.us/a/241/raymond...te-en.html
Comments are welcomed.
...
written by skeptonomist, August 05, 2011 2:05
"Very few cite the availability or cost of finance [as their biggest problem]"

How can anyone cite data of this nature, as a proof of the importance of demand, and then turn around and say that it is important for the Fed to cut interest rates, or promise higher inflation, which is similar as affecting future profits? Dean does this in a later post, but others do it as well. Interest rates are not the bottleneck now. As the economic outlook worsens, and specifically as businessmen see decreased demand, interest rates become less important - they aren't going to invest, and if they are given money they will hoard it or in the case of corporations, buy back their own stock. Big business has plenty of money anyway, without borrowing.

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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.

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