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Home Publications Blogs Beat the Press The Washington Post STILL Has Not Noticed the $8 Trillion Housing Bubble

The Washington Post STILL Has Not Noticed the $8 Trillion Housing Bubble

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Friday, 22 October 2010 05:26

News apparently takes a long time to reach downtown Washington, D.C. That is the only conclusion that Washington Post readers can have after seeing the paper attribute the economic downturn to: "the ways the subprime mortgage crisis that began in 2007 would ripple through the economy."

Of course the downturn was not due to subprime mortgage crisis, it was due to the collapse of a housing bubble. Residential construction would not have been cut by more than 50 percent if the issue was just the subprime crisis. It fell by 50 percent because the bubble led to enormous overbuilding of housing.

Similarly the saving rate has risen by more than 6 percentage points, leading to falloff in annual consumption of more than $600 billion. This is not the result of the subprime crisis. This is the result of the loss of $6 trillion in housing bubble wealth, along with the loss of $6 trillion in stock market wealth which was supported by housing bubble driven growth.

The subprime crisis was a triggering event. Had there not been an enormous housing bubble in the process of bursting the subprime crisis would have had little macroeconomic consequence. This news may at some point reach the Post. 

The article also includes a strange analysis of the current housing market:

"If the foreclosure process is slowed down too much, it could lead people to hold off on home purchases as they wait for a new, cheaper supply of homes to hit the market. In that sense, it could further delay a recovery in the long-ailing housing market."

If the foreclosure process is slowed then it reduces supply. If people delay purchases, then this reduces demand. In principle, this doesn't move prices in either direction, unless there is a reason to believe that one effect is markedly larger than the other.

As a practical matter, banks are sitting on a huge inventory of foreclosed homes so a moratorium is likely to have very little impact on the supply of foreclosed homes coming on the market. The dire warnings of the consequences of such a moratorium don't really have a basis in reality.

Comments (11)Add Comment
Schrodinger's Paradox and the Missing Bubble
written by izzatzo, October 22, 2010 8:19
If the foreclosure process is slowed then it reduces supply. If people delay purchases, then this reduces demand. In principle, this doesn't move prices in either direction, unless there is a reason to believe that one effect is markedly larger than the other.


This also explains why reporters can't see the bubble that was there as the primary causal effect. In Quantum Economics, a paradox known as Schrodinger's Bubble causes the bubble to disappear when reporters attempt to see it, because the state of perception itself changes depending on who is looking.

If the bubble was in a box with the Schrodinger Cat, it would disappear everytime the lid was opened by a reporter, but it would still be there albeit in burst form.

This is why events like subprime mortgages are mistakenly reported as the primary cause of the Deep Recession rather than the housing bubble, because the only way to know what's in the Quantum Economics box is through unbiased faith which comes from thorough investigative reporting of the unseeable evidence.
It's easy to not notice things
written by Matt, October 22, 2010 8:59
It's easy to not notice things when ideology requires it - the Post is just carrying water for the standard RW "it's the poor people's fault" line that's been thoroughly debunked.
...
written by Some Guy, October 22, 2010 11:25
That's because the bubble hasn't really fully popped in DC. You are still looking at paying $500-600K for a 4 bedroom house that would run $150K anywhere else.
It is difficult to get a man to understand something when his job depends on not understanding it.- Upton Sinclair
written by Scott ffolliott, October 22, 2010 12:19
Lest we forget:
It is difficult to get a man to understand something when his job depends on not understanding it.- Upton Sinclair
QE2 is once again showing the Federal Reserves Banks bias against labor.
written by Scott ffolliott, October 22, 2010 12:34
QE2 is once again showing the Federal Reserves Banks bias against labor. Capital is simply used in a shell game while the working people also know as labor have their lives ripped apart without work that produces for the benefit of the public good.
The issue at hand is that of the pubic benefit vs. private profit.
...
written by Ed Dolan, October 22, 2010 3:06
"Of course the downturn was not due to subprime mortgage crisis, it was due to the collapse of a housing bubble."

OK, but who says the causation has to run in just one direction? It seems perfectly reasonable to me to think that the housing bubble itself, in turn, was aggravated by the availability of very low-cost credit, including things like option-payment mortgages and 110% loan-to-value contracts, and no-doc underwriting practices. The housing bubble was not fed by sunspots. People did not build all those unneeded houses because they caught some kind of virus. The bubble was fed by easy credit, part of which can be traced to easy monetary policy, but part also to easy subprime lending practices. The bottom line: I'm not sure the WP's position is quite as preposterous as this post makes it out to be.
we all need to become better writers and thinkers
written by faustroll, October 22, 2010 5:02
As the previous commenter pointed out, although this Irwin character used the outmoded and politically tinged moniker "subprime crisis" to describe the much larger contracting of excessive leverage and Ponzi finance sometimes described, also inaccurately, as a Minsky moment, too much should not be read into his poor choice of terms.

In addition, rather than focusing on the entire paper as one monolithic unit, it might be better to say that Irwin and his individual editor need to get up to speed on what terms are more appropriate to describe the asset and credit bubble and its demise. Or perhaps the WP's internal style guide needs to be updated?

I see this as another example of poor writing and thinking by this reporter rather than a reflection on the WP as a whole. The whole of the article is somewhat confused and seems to be caught between an attempt to do some reporting and an assumed obligation to not create panic in those not following this very closely.

...
written by Calgacus, October 22, 2010 5:42
It fell by 50 percent because the bubble led to enormous overbuilding of housing.

The most passage from Warren Mosler's SEVEN DEADLY INNOCENT FRAUDS OF ECONOMIC POLICY that struck me the most was this one:

And in 1972, with a US population of just over 200 million, these plain, dumb, boring savings banks financed 2.6 million new housing starts, with no secondary markets, no futures markets, and very modestly paid employees ...

Today, with a population of over 300 million, a massive financial sector, untold financial innovations, and unlimited financial resources and liquidity, if we manage to get 2 million housing starts a year, it’s proclaimed an unsustainable bubble.


The problem is not the unreasonable supply, but that now, unlike 1972, the game has been rigged so that all the income goes to the feed the predatory greed of the top, and the only way everyone else has to play is by going into unsustainable debt.
...
written by Eric, October 23, 2010 9:33
The so-called wealth effect isn't as straightforward as some would think. Prices on homes have dropped substantially in my city. I can now think about 5 houses within 4 blocks of where I am living today that I can afford without taking huge risks or living like a pauper. They are objectively the exact same houses that they were 4 years ago when buying them would have been terribly stressful. I'm not sure I'll buy any of them at this time, but, relative to housing, I definitely am "wealthier" in my options.
Why is Ed wrong?
written by Melissa Belvadi, October 23, 2010 1:10
I was thinking the same thing as Ed Dolan, but everyone seems to be giving him negative votes. Could someone explain why you think he's wrong? It makes perfect economic sense to me that if you flood a market with new buyers, the "subprime" borrowers, that would push prices up fast, which caused the housing bubble. If the flood of previously ineligible buyers isn't what caused the housing bubble, then what did?
...
written by liberal, October 24, 2010 9:10
Ed Dolan wrote,
OK, but who says the causation has to run in just one direction? It seems perfectly reasonable to me to think that the housing bubble itself, in turn, was aggravated by the availability of very low-cost credit, including things like option-payment mortgages and 110% loan-to-value contracts, and no-doc underwriting practices.


Agreed. No doc etc ==> housing bubble ==> Great Depression II.

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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.

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