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Home Publications Blogs Beat the Press The Fed's Vice Chair Still Doesn't Know About the Housing Bubble

The Fed's Vice Chair Still Doesn't Know About the Housing Bubble

Tuesday, 12 August 2014 04:51

News apparently travels slowly in the nation's capital. The New York Times reported on a speech by Stanley Fischer, the vice chair of the Fed, in which he expressed confusion over the causes of the weak recovery.

It would have been helpful to express the views of economists who could have expressed surprise over Fischer's confusion. When the housing bubble collapsed, there was a massive loss of demand. Spending on residential construction fell back by more than 4.0 percentage points of GDP. With the loss of $8 trillion in housing wealth, consumption fell back by close to 3.0 percentage points of GDP. This created a total gap of 7 percentage points of GDP, which is close to $1.2 trillion in today's economy.

Residential construction has recovered to some extent, but it is still well below its bubble peaks. Unless we see another bubble, there is no reason to expect construction to get back anywhere near its 2005-2006 share of GDP. Consumption has also recovered to some extent, but without the bubble wealth that drove it, there is no reason to expect it to reach the same share of output as in the bubble years.

Unless Fischer has some very novel theory of the economy, there would have been no reason to expect a more rapid bounce back of the economy than what we saw, especially after the federal government turned to austerity in 2011. It would have been helpful if the NYT had focused on the seeming confusion in Fischer's thinking.



Having read Fischer's speech, I think the confusion is more in the reporting than in the speech, which seems largely on the mark on the current state of the economy. The spelling of "Fischer" has also been corrected.

Comments (12)Add Comment
written by Ralph Musgrave, August 12, 2014 5:42

By way of contrast, I went to a conference recently where Adam Posen claimed that ALL recessions and crashes were caused by house bubble collapses. Someone than pointed out to him that house bubbles didn't have much to do with the 1929 crash.
Adam Posen stories
written by Dean, August 12, 2014 6:50
I usually think of Adam as a pretty astute economist so that one surprises me, although I remember speaking just after him at a conference in September of 2008 where he had just told the audience that the worst was behind us.
Nyt and WaPo's reporting on Fischer's speech left out some stuff
written by jaaaaayceeeee, August 12, 2014 7:09

I liked that at the end, after Fischer's conclusions, he couldn't help by say, "although I earlier foreswore discussion of fiscal policy, it is clear that fiscal policies can be used both to increase growth and to deal with potential problems of financial stability".

I assume he is echoing Bernanke's regular admonishment to stop preventing economic recovery with austerity, and one could even wish he were giving a shout out to tax reform including financial transaction tax.
Well, Fisher was In Israel in 2007-08
written by sherparick, August 12, 2014 7:42
Actually, when you read his speech, he sounds like you so I think this a rather poor summary by the Times.

".... Moreover, the wealth effect from the decline in housing prices, as well as the inability of many underwater households to take advantage of low interest rates to refinance their mortgages, may have reduced household demand for non-housing goods and services. Indeed, some researchers have argued that the failure to deal decisively with the housing problem seriously prolonged and deepened the crisis.6 Growth in other countries that experienced financial crises, including the United Kingdom, Ireland, and Spain, has been weighted down by struggling residential sectors. More recently, many of these fact..." He does not mention the trade deficit which seems to have become background noise for America's economic elite.
Also, he was talking about "Global" and not Just U.S. Growth
written by sherparick, August 12, 2014 7:47
As disappointing. However, again, if the two largest economic zones, Europe and the U.S. suffer from diminished private demand due to housing busts and then practice Fiscal austerity, it should not be a surprise that the whole global economy reflects the depressed state, unless the one country that could have picked up private demand, China, did so
NYT fails again
written by Squeezed Turnip, August 12, 2014 8:15
Fischer was Ben Bernanke's, Mario Draghi's and Greg Mankiw's Ph.D. thesis advisor, which does raise an eyebrow of concern.

Seriously, though, if you read Fischer's text for his speech it becomes clear that the confusion is on the part of the reporters and/or editors at the Times. Elsewhere, Bloomberg Businessweek seemed to have no problem digesting the speech
The Emperors Clothes
written by Ellis, August 12, 2014 10:52
Economists resort to mystifying terms like: economic headwinds, or disappointing results.

But they don't dare mention that profits have never been higher. And the last thing in the world they ever do is link low pay and high profits.

Economists' pronouncements are straight out of a corporate fantasy world.

if the bubble was a bubble....
written by pete, August 12, 2014 11:02
Why do we compare current conditions or the "recovery" to the artificial wealth effect created by $8T in artificial home equity (was that equity or value, not clear). I.e., The 2006 economy was somewhat artificial, and we should not compare current situations to that. Issue was more of over investment in housing, and thus under investment in other wealth, like factories, etc.

Bottom line is was there generally overinvestment, or simply skewed investment. And the difference matters, since employees developed skills (like carpentry) which may be inappropriate for other jobs.
I usually see the spelling
written by Lord, August 12, 2014 12:12
I usually see the spelling Fischer
Let's Not Be Stupid
written by Larry Signor, August 12, 2014 6:51
The housing bubble was the result of very inequitable income distribution over the last 40 years. The bubble was driven by Wall street, but we bought into it because it meant a new car or college tuition or whatever we did not have the income to purchase. Fischer misses the boat, so to speak, on his negligence of this fact. The structural problem with the economy is simply inequitable distribution of the economic gains. True story.
written by watermelonpunch, August 12, 2014 7:34

The confusion is often created in the reporting. *sigh*
Came upon this prescient quote in a Kaldor paper (1939)
written by Ner Dup, August 12, 2014 9:33
Mr. Hawtrey is well aware of this constitutional weakness of the bank ratemechanism; andhecallsthestateofaffairswherethemechanismisput out of action through the bank rate having reached its minimum level, a "credit deadlock." But he is too much inclined, I think, to attribute the emergenceof a "credit deadlock" to past mistakes in banking policy-to the Central Bank not having lowered the rate sufficiently soon, or sufficiently suddenly-rather than to the inherent causes connected with the long-term rate.' If Professor Hicks' calculations are right, and 2 percent is now to be regarded as the necessary marginal risk premium by which the current long- term rate exceeds the average savings deposit rate, then a 3 per cent rate on Consols presupposes a 1 per cent average on deposits; and a 1 per cent rate on deposits is perilously near its absolute minimum level. If "fullemployment" requires a long-term rate which is below 3 per cent, and this is what the monetary authorities aim at, the "credit deadlock" becomes a more or less
permanent state of affairs.

(the end of the last paragraph of "Speculation and Economic Stability", Nicholas Kaldor, The Review of Economic Studies, Vol. 7, No. 1 (Oct., 1939), pp. 1-27.)

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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.