Dean Baker Largely on the Mark - Crisis Was Predictable

I don't always agree with economist Dean Baker. For one thing, he appears to believe that the risks associated with high budget deficits are overstated, especially when economic circumstances are as dire as they are now, even though evidence suggests that may not be the case. He also seems to think that Chinese purchases of U.S. government bonds do not keep our rates lower than they might otherwise be, despite the fact that scholarly analysis indicates otherwise.

That said, I think he is largely on the mark in his criticism of one well known economist in a post at his Beat the Press blog, entitled "Sorry Greg, This Crisis Was Completely Predictable and Predicted":

Gregory Mankiw uses his NYT column today to give us an explicit "who could have known?" about the economy crisis. He tells readers that: "fluctuations in economic activity are largely unpredictable."

No, this crisis was completely predictable. The problem was that the leading lights in the economics profession completely missed the boat and are now using their platforms to tell the public that it wasn't their fault.

The basic story was and is the housing bubble. How could they miss an $8 trillion housing bubble? What were they smoking?

Comments

[Missing_Link:]

Yep, somehow an $8 trillion housing bubble formed and nobody noticed. And banks across the country somehow didn't notice the massive leveraging on their balance sheets that would suddenly nearly sink all of them and take the entire economy when the economy sputtered, and require multi-trillion-dollar government intervention.

Nice work, Wall Street.

What exactly are we paying you fuckers for again?

May 25 12:42 AM

[Fighting Yoda:]

Yes the crisis was predictable and was predicted, by some very accurately. It was the home price bubble, the credit bubble, and debt/leverage. No doc, no down payment loans for homes at fantastic prices - of course the crash would happen. But the tragedy is the regulators and the financiers (banks) whose job is to predict and forestall such crisis - never saw anything. Several of them (still in their jobs) - still do not realize the full impact of the crisis and necessary corrective actions required.

Bailouts and handouts, and continuing cheap money is simply making things worse, and prolonging the crisis. Auto bailouts and cram downs of secured bond holders of Chrysler is setting dangerous precedents – all very bad for capitalism and markets in general.

Lot worse yet to unfold, despite all the recent euphoria.

May 25 03:24 AM

[Did U Think...:]

Government economists kept pushing the pyramid scheme telling us we could grow our way out of debt. The said "grow the debt - YES, but grow the productive capacity of the economy (i.e. GDP) even faster. In other words, something for nothing. In even plainer terms: a pyramid scheme.

Now you know what the Illuminati stand for with their pyramids. They are con men of the highest order and have perpetrated the most massive con job in the history of the planet. Through the modern alchemist's tools of fiat currency and fraction reserve banking, central bankers the world over have allowed credit to massively debase the planet's currencies over a period of years. Now that the debt is being defaulted on the money supply is shrinking again faster than the pyramid scheme operators can dump money back in. This is the cause of deflation. At some point the debt will all be defaulted on and then we will start to see hyperinflation. First deflation and then hyperinflation will make sure that most people lose most everything they have which is how the pyramid scheme worshipers plan to pay for this rip off.

I am just waiting for the riots to start in big US cities.

May 26 12:54 AM

[BrentB:]

To be more precise, it was an $8T mortgage bubble - between 2000 and 2008 the value of all mortgages went from under $7T to over $14T.

The percentage of people owning their own homes rose about 5% in that time.

Even if all those new homeowners had totally bogus loans it could not have caused the bubble. The bubble was caused by average folks using their homes to finance consumption.

You cannot blame someone else, some shoddy lender, some ethnic borrower who lied about her means. It was the average joe the plumber. Accept responsibility America.

It is time for America to accept that Pogo was right: We have seen the enemy and it is us.

Understanding that the responsibility is national - almost every homeowner is involved - is important for investors.

The solution will not involve a lot of pain for a few bad apple borrowers. The solution will involve some pain for almost every single homeowner for a very long time.

What parts of the economy grow under these conditions? That is where you invest.

Where is that again?

May 26 01:37 AM