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Home Publications Blogs Beat the Press The Damage From the Housing Bubble: How Much Did the Greenspan-Rubin Gang Cost Us?

The Damage From the Housing Bubble: How Much Did the Greenspan-Rubin Gang Cost Us?

Tuesday, 21 January 2014 21:21

Eduardo Porter asks how much the housing bubble and its collapse cost us in his column today. (He actually asks about the financial crisis, but this was secondary. The damage was caused by the loss of demand driven by bubble wealth in a context where we had nothing to replace it.) Porter throws out some estimates from different sources, but there are some fairly straightforward ways to get some numbers from authoritative sources.

We can use as a starting point the Congressional Budget Office's projections for GDP growth from 2008, before it recognized the damage from the collapse of the bubble. We can then compare these projections with the most recent projections from last year.

If we just take the dollar losses through 2013 we get $7.6 trillion, in 2013 dollars. This is just economic losses, it does not include any effort to quantify the pain that workers or their families have suffered from being unemployed or losing their homes. This comes to roughly $25,000 for every person in the country. Alternatively, it is 190 times as much as the Republicans hoped to save from their cuts to food stamps over the next decade.

Many folks around Washington like to talk about 75 year numbers, which is the period over which we project Social Security and Medicare spending and revenue. If we assume that the economy's growth rate in years after 2018 is not affected by the collapse of the bubble, then the cumulative loss in output through 2089 as a result of the collapse of the Greenspan-Rubin bubble would be $66.3 trillion. This amount is almost seven times the size of the projected Social Security shortfall.

If we really want to have fun, we can sum the shortfall over the infinite horizon, an accounting technique that is gaining popularity among those advocating cuts to Social Security and Medicare. The loss over the infinite horizon due to the Greenspan-Rubin bubble would be over $140 trillion, or more than $400,000 for every man, woman, and child in the country.

Obviously these numbers are very speculative but the basic story is very simple. If you want to have a big political battle in Washington, start yelling about people freeloading on food stamps, but if you actually care about where the real money is, look at the massive wreckage being done by the Wall Street boys and incompetent policy makers in Washington.

Comments (17)Add Comment
you mean ...
written by Squeezed Turnip, January 21, 2014 8:47
… the Wall Street boys and incompetent policy makers in Washington.

Oh, you mean the ghostwriters of the Bezos Post?
You mean the Greenspan-Rubin-KRUGMAN housing bubble, Low-rated comment [Show]
Bubble counterfactuals.
written by MS, January 21, 2014 9:52
Wouldn't the better starting point be projections for GDP growth from 1997 - or from whatever date one could reasonably claim preceded the bubble altogether? Projections from 2008 clearly were premised upon demand driven by bubble wealth and were therefore unrealistic to begin with.
written by Stuart Levine, January 21, 2014 10:15
The comment of "Capt. J. Parker" was essentially answered by Paul Krugman in 2010, as a 30 second Google search of the term "krugman housing bubble" would have revealed. At that time, Krugman explained: "If you read it in context, you’ll see that I wasn’t calling for a bubble — I was talking about the limits to the Fed’s powers, saying that the only way Greenspan could achieve recovery would be if he were able to create a new bubble, which is NOT the same thing as saying that this was a good idea. Of course, I know that this explanation won’t keep the haters from pulling up the same quote out of context, over and over." http://nyti.ms/1cTjBVJ

Krugman was right in 2002 in the piece that "Capt. J. Parker" links to and he was right about "Capt. J. Parker" in 2010.
MS is right
written by Marcus, January 22, 2014 12:22
Dean, why do you insist on using those bogus 2008 numbers as a baseline? You've used them at least half a dozen times over the past couple of years to prove this point or that.

Those projections were inflated by the bubble itself, based on the assumption that the economy would keep humming along well into the future. Those assumptions turned out to be about as wrong as they could be. Therefore the numbers are worthless for comparison.
How the Financial Sector Made the Dinosaurs Better Off With an Asset Bubble
written by Last Mover, January 22, 2014 4:15
The loss over the infinite horizon due to the Greenspan-Rubin bubble would be over $140 trillion, or more than $400,000 for every man, woman, and child in the country.

Wait till the Pete Peterson Foundation gets hold of this funded intentional liability by the financial sector that brought America down. Maybe they can project it backwards over an infinite horizon and tell us how it made the dinosaurs better off as well.

@ Marcus and MS above, you're making the same mistake as the military clown before you with the credentials plastered on his forehead to hide the lack of qualifications including basic reading skills, Captain J. Parker.

During the bubble the economy was generally around full employment, not above it, not creating general demand pull inflation. Housing bubble prices are not the same thing as general inflation.

That's why 2008 serves as a reasonable baseline for potential GDP output going forward, because that's where the economy was because of the bubble that replaced lost demand from lower wages. Without the bubble there would have been serious unemployment below potential GNP.
2008 Is the right starting point
written by Dean, January 22, 2014 4:41
Folks 2008 is a perfectly reasonable starting point. The bubble was sustaining demand -- in principle we could have had anything sustain demand. We could spend more on infrastructure, we could have a drop in the dollar give us balanced trade, or we could pay people to read the Washington Post. The only thing that prevents us from sustaining demand is political opposition. For this reason, 2008 is a perfectly reasonable starting point.
Bubble damage.
written by MS, January 22, 2014 6:49
I certainly understand the point that any other source of demand could have theoretically taken the place of housing. The topic of the blog post, however, is the harm caused by the housing bubble. Presumably, harm should be calculated on a "net" and not "gross" basis.
Bubble counter-factual is standard economics
written by Dean, January 22, 2014 7:32
The assumption in the calculation is that we would have had some other source of demand to replace the bubble demand. That is standard economics used all the time in assessing things like the impact of cutting government spending in various area. Could be wrong, but that is the industry standard. I'll forward your complain to the American Economics Association.
written by kharris, January 22, 2014 7:44
The complaint has been lodged that Baker is using an exaggerated base-line level of output because output in 2008 was inflated by the housing bubble. Well, maybe not.

First off, Friedman suggested, in his "plucking" model, that the business cycle is asymmetrical, that there is no such thing as an overshoot of real output beyond capacity. In this model, output falls below potential during periods of recession or slow growth, then returns to potential (if we're lucky) during the rest of the cycle. This view is consistent with the notion that sectoral bubbles divert resources from the rest of the economy, so that strong housing growth is bought at the cost of slower growth in other sectors.

So much for theory. What's in the data? Real GDP growth in the 2002-2008 expansion was slower than in prior recent expansions. Remember Summers' OpEd about the economy relying on bubbles for growth? It was based on the reality of a middling expansion driven by the housing bubble. To me, it seems perfectly reasonable to think that investment driven by speculation could be less efficient, so induce less growth, than investment driven by non-speculative fundamentals.
written by skeptonomist, January 22, 2014 9:45
It's certainly reasonable to blame Greenspan but we should also include the many economists who supported him and the general idea that the Fed can control the economy. Around 2001 housing was considered to be a good method of stimulating demand in recessions and as noted by Capt. J Parker, Krugman among others thought it might be a good idea to actually have a bubble. Krugman changed his mind by 2005, but then he supported the appointment of Bernanke, who at that time explicitly denied the existence of a bubble, and even that the Fed had responsibility to control asset bubbles. The housing bubble was uniquely dangerous because of particular regulatory failures; literally everyone missed some of the dangers such as that of CDS's. Regulations were relaxed in part because of confidence that the Fed could handle any problems.

There is no evidence that the Fed has the power, even if the Maestros had the will, to generate booms or bubbles and then deflate them in such a way as to precisely counter the natural oscillations of the business cycle. Just because economic theory - which is much more poorly founded than Dean assumes - predicts that certain actions by authorities will have certain effects does not mean that those authorities can have precise control.

I don't see how Rubin gets into this - he was not in the Bush administration or the Fed at the time of the housing bubble. Blame him for the rise of the trade deficit, although that actually started before he came to power and is a much more complicated thing than Dean usually represents.
written by skeptonomist, January 22, 2014 9:53
Krugman in 2002:

"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble."

This is quite clear. Krugman then expresses doubt that Greenspan can do it; he does not condemn the idea of increasing household spending through a housing bubble.
written by jroll, January 22, 2014 10:09
Guys, please read this column from August 2002 where he cites Baker on the bubble for some added context: http://www.nytimes.com/2002/08...e-gap.html
written by Jim Shannom, January 22, 2014 10:41
Blah blah blah! Blame everyone but the real culprits. We all clearly know how much we lost because of financial deregulation and the failure of government to protect the 99 percent. We The People need to recognize there is a solution and the only solution that will permanently eliminate the corruption which clearly infects all governments. The last fifty years stand as proof that the CentaMillionaire$ and Billionaire$ need to be taxed out of existence! We The People are all brainwashed sissy pants bed wetters for our failure to not only see the obvious but begin the movement for real meaningful change.
More quoters
written by jroll, January 22, 2014 10:43
Learned something.
written by MS, January 22, 2014 1:02
I appreciate the explanation of (heretofore unfamiliar to me) standard practices of economists. I would only hope that economists avoid subjects like, "The Death Toll from the Alexander Fleming Gang" -- the results would focus strictly on the incidence of anaphylactic reactions to penicillin, on the assumption that safer antibiotics would otherwise have been discovered and used.
written by J, January 23, 2014 7:31
>the results would focus strictly on the incidence of anaphylactic reactions to penicillin, on the assumption that safer antibiotics would otherwise have been discovered and used.

You should see the amateur analysis of the economic effects of me not buying that pair of jeans I looked at yesterday, the one that assumes that I would spend the rest of my life going in and out of prison for indecent exposure.

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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.