Housing Bubble Nostalgia?

by: Dean Baker

Does the NYT invest in Pets.com? For those young'uns out there, Pets.com was the poster child of the craziness of the 90's stock bubble. At the peak of the bubble it had a market valuation in the hundreds of millions of dollars even though it had never made a profit nor any clear way of making a profit.

While most people now recognize the craziness of the stock bubble years, there are some people, apparently including the NYT editorial board, who still do not recognize the craziness of the housing bubble years. Its editorial today calls for stronger measures from the Obama administration in the hope of "restoring home equity," which in turn it tells readers "is also crucial to getting consumers to spend again."

Um, no, it is not crucial to getting consumers to spend again since consumers are already spending at a higher than normal rate. The saving rate is currently around 5 percent compared to a pre-bubble average of more than 8 percent. It continues to be the case that consumption is higher than normal, not lower than normal. This corresponds to a situation in which households are putting little aside for retirement. That is especially dangerous when almost all the serious people in Washington want to cut their Social Security and Medicare benefits.

In the short term, the demand lost from the housing bubble will have to be filled by government deficits. In the longer term we will have to get the dollar down to increase exports. This is what Mr. Arithmetic says and no one has ever won an argument with him.