Do Bubbles Bother Bernanke?
Do bubbles bother Bernanke?
Study cites recent trends that signal housing bubble
Immediate Release: November
Washington, DC - Recent trends in the housing market suggest a dangerous housing bubble, rather than a run-up caused by fundamental factors such as higher incomes and population growth, according to a new study by the Center for Economic and Policy Research (CEPR).
The report, "Will a Bursting Bubble Trouble Bernanke? The Evidence for a Housing Bubble," cites three trends in the housing market that suggest an unsustainable increase in house prices: 1) A sharp divergence between house sale prices and rents; 2) An extraordinary jump in the rate of housing construction; and 3) A sharp decline in the savings rate, driven by a housing wealth effect.
Federal Reserve Board chairman nominee, Benjamin Bernanke, has argued that there is no housing bubble and, therefore, no reason for the Fed to take action to address the bubble. Bernanke's approach raises grave risks, since the impact of a bursting housing bubble is likely to be even greater than the collapse of the stock bubble. The collapse of the housing bubble will throw the economy into a recession, and quite likely a severe recession, according to economist Dean Baker, co-author of the report.
"If the Fed chooses to let a housing bubble expand unchecked, the eventual cost to the economy and millions of American families could be enormous," said Baker.
The report, by Dean Baker and David Rosnick, found three housing patterns that are tell-tale signs of a housing bubble:
For the full report, click here.
The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people's lives.