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.