Wall Street Deficit Hawks Have No Shame

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Dean Baker
Truthout, April 12, 2010

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Almost 25 million people are unemployed or underemployed right now. This was a completely preventable disaster. This is worth repeating a few hundred billion times so that even the geniuses in Washington can understand it.

The disaster was completely preventable. The reason we had the disaster was that the people controlling economic policy, that would be people like Alan Greenspan and Robert Rubin, either had no clue about the housing bubble or deliberately decided to ignore it.

Nothing about this story is complicated – let’s write this so that even a Wall Street billionaire can understand it. We had an $8 trillion housing bubble. It was inevitable that it would collapse. Bubbles do that. When we get an over-priced housing market then builders build more homes. That’s because it becomes very profitable to build homes when prices are high. If builders keep building lots of homes, then eventually there will not be enough people to buy them at bubble–inflated prices, even with the loony mortgages being pushed at the time by the Wall Street banks.

When people can no longer buy homes, their prices drop. When their prices drop people will default on their mortgages and banks lose lots of money.

More importantly, when prices drop, builders stop building homes. People also stop spending money based on their housing bubble wealth. The falloff in construction and consumption implies more than $1 trillion in lost demand in the economy. This lost demand throws the economy into a serious recession, with tens of millions of people losing their jobs. It’s all very very simple. You probably don’t even need an intro economics course to understand it.

But, the deficit hawks, led by Wall Street investment banker Peter Peterson either did not see the bubble or chose to ignore it. They ran around the country in the peak years of the housing bubble yelling about “fiscal irresponsibility” even as the housing bubble was growing to ever more dangerous levels. They used their money and their political standing to dominate public debate and crowd out those of us who were trying to warn about the bubble. There were numerous television shows, radio shows and news stories devoted to their dire warnings about the deficit. They even persuaded a major documentary maker to put out a movie, IOUSA, highlighting their scare stories.

The bursting of the bubble has had a devastating impact on the lives of tens of millions of people across the United States and hundreds of millions of people around the world. This is by far the worst economic disaster in the United States since the Great Depression. If the Wall Street deficit hawk crew hadn’t dominated public debate on economic issues as the bubble was building perhaps those of us warning of the bubble could have been heard. Maybe momentum would have grown to burst the bubble before it reached such dangerous levels.

Ironically, the collapse of the bubble was even a disaster from the standpoint of the issue that concerns the deficit hawks most: the deficit. The deficits that the nation is incurring as a result of the collapse of the housing bubble are projected to have added more than $4 trillion to the national debt by the end of this decade.

The people who allowed for this bubble to grow unchecked should be incredibly embarrassed and certainly should be apologetic about laying the basis for this wreckage. It is difficult to envision a more serious policy failure.

But no, the deficit hawks are as sanctimonious as ever. They are running around as though nothing happened. They are still preaching the exact same lines to the public that they did before the collapse of the bubble, but now with greater urgency due to the damage to the government’s balance sheet caused by the downturn.

The media should be jumping on deficit hawks like Peter Peterson and asking him why anyone should take him seriously now when he was so incredibly and disastrously wrong about the economy just a few years ago. Unfortunately, Mr. Peterson doesn’t get questions like this; he just gets praise for his willingness to try to take Social Security and Medicare away from retired workers.

The problem is that Peter Peterson has billions of dollars. To the national media and other actors in national policy debates, Peterson’s wealth matters much more than whether or not what he is saying makes sense. That is good news for Peter Peterson, but really bad news for the rest of us.


Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.