The housing bubble may have added $8 trillion in equity to the RE market but that has not been lost - yet. The number based on median price declines is in the the 2 to 3 range.

But your basic point is still correct that it is the housing collapse that is driving us into recession. However, the cost of the war should not be underestimated. This makes it that much more difficult for the government to run deficits to deal with this problem. A typical response to counter the coming recession coupled with the Iraq war costs could very result in another bout of hyperinflation.

I'm just wondering if that $180 billion annual war spending figure is accurate. Seems like the supplemental appropriations each year have been for nearly that amount, but that's just my memory.

I don't believe the war itself or the spending for it is primarily responsible for the recession, but it is an important part of the entire deliberate philosophy of attempting to hamstring the federal government by bringing it to the brink of bankruptcy through a combination of outrageous tax cuts for the wealthy and massive increases in military spending a la the Grover Norquist school of achieving conservative policy aims. The housing bubble may have tipped the balance, but certainly the extremist ideology behind the tax cute and military spending bings philosophy is going to exacerbate the situation and retard the government's ability to blunt those effects.

Mr. Baker, I'd be very interested in how you explain the divergence between your own view and that of the Prof. who recently testified before congress and said that the housing bubble is integrally related to the war. Last week Josh linked to an article in The Australian that discussed the profressor's position on this question. Can you comment on that?

And the war; its effects on gas ($34 a barrel -invasion - $104 a barrel now); the debilitating effect on our psyche resulting from torturing our prisoners; our loss of stature in the world; our uncountable expenses to take care of our wounded; our use of money in Iraq instead of our own infrastructure; our payment to BlackWater instead of reconstructing New Orleans; all this means NOTHING?

YOU ARE EITHER CRAZY OR STUPID!

Have you ever heard the term: MULTIFACTORIAL?

So, because the housing bubble is huge it can't ALSO be the war. You quote a cost of $150 billion a year. What does that include? Prosthetics? Mental health care for the next 30 years? And all the other ways that the Bush administration hides costs (how about the fact that KBR, with Cheney's help has gotten out of paying social security and other fees for their employees by basing their offices out of the US? What is the cost of THAT for THOSE Anerican employees who return without any retirement?)

Let me ask you. Have you ever had to actually support yourself with a regular job? If you did you might be able to realize that life is complicated, and there is usually more than one factor involved in a cluster fu*k of this magnitude.

I don't know where TPM gets people like you!

CVille,

the fact that the war is really bad for lots of different reasons doesn't mean that it caused the recession, and who I work for or where I work won't change that fact.

Suppose the war will cause another 20 million people to be on disability in 10 years, can you tell me how that fact would cause a recession today?

The war knocked perhaps 1 -2 million barrels per day off line. This compares to worldwide production of more than 85 million barrels a day. That amount of lost production will not raise the price of oil by $80 a barrel, even if you call me "CRAZY OR STUPID."

I am completely opposed to the war. I protested against it before it happened and I would like to us get out of Iraq tomorrow. But not liking the war doesn't mean that i can blame it for every bad thing in the world. The war did not cause global warming or AIDS, and it didn't cause the recession.

So, we're going to have a recession. Big deal. It's about time.

No free market economy can inoculate itself from the effects of the huge amounts of money sloshing around the world. Ten years ago that money went into unproductive routers and dark fiber; lately, it's gone into unproductive real estate and equally unproductive mergers and acquisitions.

The answer is deflation, now, or fifteen years of exceedingly slow growth.

N.B. That harsh prescription doesn't mean that we shouldn't expand and fully finance a complete safety net. Nor does it mean that a socialist government couldn't soak up that excess capital and apply it to productive uses. But America isn't a socialist country.

The stupid Fed caused us to print too much stupid money, thus causing this whole mess. And Ben wants to "solve" it by printing even more money.

The war has not helped. War is a net loss to the economy from the get-go. It is not the primary cause of the recession, but it certainly did not help.

The projections show that the war initially has a positive economic impact by spurring demand.

Cough! Broken window fallacy. Cough!

Mr. Baker,

"the war did not give us thehousing bubble"---are you serious?

why were the credit markets eased to the point of giving anyone with a pulse a loan?

when were the credit markets eased? 2001...why, why and why?

Please refocus so you can see the whole board....

what about our infastructure, which is falling apart in this country, well at least we will build iraqs, help there healthcare system, while ours goes in the toilet. its all about oil.

While I will agree that the timing of the recession and its virulence has come from the collapse of the housing bubble, that is quite short-term. The housing bubble did not just happen. It was created by the Federal Reserve in order to delay the recessionary effects of the collapse of the dot.conm bubble, also created by the Federal Reserve's manipulation of interest rates.

This has been mismanagement of the macro economy for political reasons, one of which was to sustain the Occupation of Iraq. a recession causes the incumbent party to be removed from office, and Alan Greenspan has been nothing if not a clear and obvious Republican supporter.

The housing bubble can be traced clearly in Greenspan's manipulation of the interest rates to pump up consumption demand, in his encouragement of consumers getting ARMs and of refinancing to extract the wealth that seemed to exist in their home equity to use for consumption, and in his refusal to regulate mortgage banking as the extracted that manufactured wealth from home equities by shoddy lending practices.

The costs of the Occupation of Iraq were out of control because they were assumed away by the Bush administration who thought that creating a free market in Iraq would create a democratic paradise based on a free market economy with minimal government. That little piece of idiocy forced Amemerica to support the Occupation by borrowing internationally, which has shoved interest rates up, and made Greenspan's job of pumping the economy up more difficult.

Much of this was possible because the policy was to create real estate wealth and extract it for consumption. It worked as long as it did because the real estate market is one in which the market is very slow to react to bad news, unlike the normally financial markets like the stock and bond exchanges.

So while I'll agree that the immediate cause and timing of the current recession has been a result of the housing bubble, that is a very short-term view of what has been happening. The stupidity of the Iraq occupation and the political manipulations of the macro-economy by the current administration especially are the real cause of the recession.

The housing bubble was a creation of those forces and could not end any other way than recession. The only question was timing.

I think it's a mistake to say that any one thing is the cause of the (apparent) curent recession. The housing bubble is a cause, and certainly the trigger.

But the vulnerability of the economy is also a contributing cause. The Republican borrow-and-spend binge has balooned the finance charges we have to pay out of current taxes to the point where recession-fighting spending hikes or tax cuts are very difficult. War spending is a big part of that. Basically, they've picked our pocket.

Also, those huge deficits are financed by borrowing from other countries (read: China). Not only does that have grave national-security implications, but it limits the Fed's ability to lower interest rates. Lower rates weaken the dollar and risk a decreased willingness of foreign investors to continue financing our debt. And a weaker dollar increases inflationary pressure, which is already at a worrisome level.

Lower debt (and lower current interest payments) would make it a lot easier to spend our way out of trouble. Like they say, payback is hell. --jzap

Mr. Baker,

The 180 billion dollar a year is suggested by some to be way too low a reflection of the true cost of the war.

Granted the housing bubble was not caused by the Iraq war but your analogy of laziness and junkfood not contributing to pneumonia, is less than apt as it trivializes the true cost.

What do you make of Joseph Stiglitz's projections that the true cost of the war, including care for the wounded, will top 3 trillion dollars?

Dr. Baker,

Do we have any reason to trust the macroeconomic numbers that the government publishes? The bush administration has famously stopped publication of statistics that show it in a bad light, and if the true condition of the U.S. economy is actually worse than we are being told, they are not trustworthy reporters, just as they have not been trustworthy on Global Warming statistics.

I realize that any reputable macro economist who questioned the government's published numbers would likely find people questioning his or her credibility. Those numbers have been an article of faith since the FDR days. But many of them are estimates based on statistical sampling. Such estimates can easily be manipulated in small ways. So it is unlikely that major economists will question those numbers for fear that they will put their careers in jeopardy. But are there any indications that economists talk about over coffee that suggest that the true numbers are really worse than what we are being told?

That's exactly what I would expect from this administration, and they have certainly politicized every other part of the government.

Nobel prize winning economist Stiglitz says the true cost of the Iraq war is/will be 3 trillion dollars. The money must have come from somewhere, no? Methinks it came from the housing bubble mortgage loan business--

Paul Krugman in today's Times says that outstanding mortgage loans on housing is 11 trillion dollars. That's 11 trillion that went up in smoke, gone, might come back, might not. So the war sucked up the money that was collected on mortgage payments. They tanked when the housing market collapsed, now credit is gone and we're are we are now--in recession.

Cliff Notes summary: Iraq war expensive, money came from mortgage payments, housing market collapses--no more money/credit. We're in deep

I guess I am in disgareement with the reason for the economic downtun / recessionary pressures. I see it as significantly releated to the cost of petrochemical products and especially fuel for all manner of devices.

World energy prices have more that doubled since 2000 and that has made a huge dent in the global economy. I suspect that without the turmoil in Iraq and escalating violence elsewhere we would not have this economic downturn. I think Arab / Islamic states are holding our feet to the fire with the oil prices and thus Iraq is very much responsible for what is happening. Our relationship via Bush foreign policy with Venezuela isn't helping a bit either. And this is influencing everything all across the globe. Alternative energy products are in high demand because of this and thus their price is driven up as well. Wind turbine production is maxed out and has a production backlog through 2011 or something like that. It just isn't possible to absorb, on a global level, more than doubling energy costs in so short an interval. Business persons are watching those prices continue to rise and have scaled back or put off plans that have an energy component. This is only logical because unless you can reliably forecast your energy cost you expose yourself to unacceptable risk. Even the housing bubble itself has been made worse because of energy costs that were constantly rising while the boom was in progress. Building homes is very energy intensive.

Iraq is seriously a part of the economic downturn. Which is just another aspect of what a failure Bush has been for the nation and the world.

Analogies are always flaky, but if the housing bubble is pneumonia, and the "borrow-and-spend" philosophy is a diet of pizza-and-soda, the Iraq war was a trip to Antarctica in a lightweight sweater.

Dean--

I agree with you completely. Except, I think the housing bubble was caused by the stock market bubble So that's the real underlying cause of what is happening now.

We never really paid for the bull market. To correct for the excesses of the boom, the S&P should have been cut in half. It wasn't. So people had money left over after the market went down, and they put it real estate. (Many insiders who were selling ahead of the crash in '98 and '99 also sank their money in real estate "to keep it safe," helping to drive up housing prices. )

Meanwhile, Greenspan kept rates low in an effort to stave off the coming recession. This only drove real estate higher.

Now, we're finally paying for the excesses of the nineties, and because this pullback was delayed, it is likely to be deeper and longer than it needed to be.

I was living in Israel during the aftermath of the Yom Kippur War. Talk about recrimination! Everybody's favorite topic was blaming somebody else for the debacle. Nobody was willing to discuss the collective euphoria post-'67, the arrogance of the victor, the unwillingness of Israel to talk to its neighbors.
So now we have Mr. Baker putting the blame on the housing bubble and 100 readers adding their 10 cents worth. Well, I will toss in my dime too. Our economic system has always gone through ups and downs. The allocation of capital in our system is not always wise - witness the dotcom bubble and now the housing bubble. Excess wealth in a deregulated economy tends to flow not in the direction of the best possible return to society but rather the best short term return to the individual. Perhaps it is time to reconsider the mantra of the Republicans - that individuals make the best economic decisions. Perhaps if Bush had galvanized the nation in 2001 into funding a crash program of energy efficiency rather than a stupid war we might have had a mini-recession in 2002 but $2 gas, trillions less debt and a more hopeful state of mind today. Adam Smith was right when the economic model was a bunch of village artisans, all pious Christians. He is way off the mark in a world dominated by mega-corporations whose motto is greed is good. We need regulation and careful planning to assure that corporate wealth benefits society and not vice-versa.

Pardon me if I interject something here that may be considered a bit far afield from the main thread. If that's the case I plead inexperience and express my apolgy in advance; while I have read TPM religiously since just a very few weeks after Josh started it, this is actually my first contribution.

However, I submit it on this thread because it does seem that there is an unusually rich field of knowledgable and articulate contributors here, and I do have a serious concern about current economic theory and modelling on which I would like to see some opinion. (Let me also claim virtual ignorance about economic theory - I do know a little about physics and complex systems though, and maybe even a smidge about small business financial statements)

So, here goes.

1. First of all, to address the principal thread, I agree with the position that there is more than one major contributor to the recession and that the war is likely as significant as the housing bubble. I also agree, with a number of others it appears, that the true economic, long term cost of this war are being *greatly* understated. In fact, I think it is probably beyond our ability at this point to estimate any closer than an order of magnitude or so what those costs will be. However, I also believe it hardly matters which it is because we have so many additional serious problems that need to be addressed as well when we consider solutions (more on this later).

2. I also understand the point about long term costs vs. a recession that is in the here-and-now. However, I believe that there is so much unexpressed, perhaps even subconscious uncertainty about the future influencing today's economic decisions (or should be), that the long term aspects are very much an element of todays recession, and especially any recovery.

3. I also think that past ratios of National debt to GDP as indicators for recovery optimism today could be misleading. Perhaps the most measurable thing I see missing from that comparison is the extent to which our balance sheet compares to those of the earlier recessions. My perception is that, though unacknowledged and obscured, the large portion of our assets in the form of cash reserves against long term liabilities [I'm speaking mainly, of course, of Social Security, Medicare, and other so-called '(unearned) entitlements'] which has been liquidated or used to service external debt is a significant difference. In my simplistic way of thinking, one can sustain positive cash flow by liquidating assets and taking on debt only so far before the piper has to be paid. I believe we've been doing both to an unusual degree this time around - especially on the assets side.

Or, since we're looking at the issue as debt vs. GDP, perhaps it would be more accurate to ask if the mix of government expense and trade balance against investment and consumption is comparable to times past. Still, my sense is that our position today is not as favorable as it was then. Or to put it another way, every act of war destroys assets, every house built is an added asset - devalued at the moment, no question, but NOT destroyed.

Anyhow it seems to me the only way some of these things can be resolved without major shifts in our way of doing business is to default on some of those liabilities. Morally and ethically (and especially personally, I am afterall almost 70 and am subsisting on those 'entitlements' and my pay as a teacher in a private school). I am not in favor of this whether it's financial market debt or internal, contracted commitments. Moreover, I am strongly suspicious that the silent strategy is to default on the latter. Or, maybe even, to also default on the foreign held debt. In fact I believe there is a very real possibility we (the US Government) might not even have a choice in the matter.

4. Finally, at least in-so-far as my comments directly relevant to this thread are concerned, I think a comparison to the recession of the '50's is particularly misleading (by the way, if I'm not mistaken, that is when the term 'recession' first came into wide usage - everyone went to great lengths to not rekindle the despair of the great depression of 30's. It was an appropriate semantic as well as real distinction and probably made a significant contribution to the recovery).

The context and the culture were very different in the 50's. We were riding high as leaders of the free world; we were highly regarded and trusted - if often envied; 'Made in the USA' had very real foreign market value (does anybody out there remember that Japan named a city(or prefecture or something) Usa so that they could imprint their products as Made in USA? - or so became an urban legend anyhow; we were on the threshold of a half-century of massive, worldwide consumer growth with all the natural resources and labor forces to fuel the first couple of decades of that growth; we were the can-do generation; and consumers used credit very little beyond the financing of homes and automobiles. In the first place consumers were more inhibited in seeking unsecured credit then. And in the second place, even had they wanted to, they couldn't have gotten it as easily then as now. Now, go through that list and compare it to today's environment. Need I say more?

Well, I have said far more than I had expected could reasonably be considered of direct relevance to the principal thread, yet I haven't even gotten to the main issue what brung me here. So, I will truncate this post at this point and get it launched (assuming there's still anyone out there). However, I will write a follow-up addressing the issues I first intended and post it as soon as available. If you've stayed with me this far you will have realized I am operating from a pretty pessimistic point of view. The next installment may help you understand why.

I am interested in what any of you might have to add to these thoughts. Since I am not that certain of the conventions here, it might be more appropriate or preferable to do so more directly. I don't know yet what the protocol is here for doing so, but I will find out. In particular, some of you may have references you would rather point me to than write it all yourself. I especially expect this to be true of Dr. Baker or those others of you who are clearly knowledgable and possibly published on these topics already.

Thank you, leandermc

Re: It was created by the Federal Reserve in order to delay the recessionary effects of the collapse of the dot.conm bubbl

???
"Delay"? We had a recession in 2001 as I recall. I agree the housing bubble was brought on by the Fed's irresponsible actions (among other causes), but the Fed was reacting to an existing recession the development of which it had ignored. And more specifically in late 2001 the Fed was reacting to the shock of 9-11. The problem of course was that the Fed allowed interest rates to remain absurdly low for too long, well after the recovery had begun and this sent money sloshing into housing. Had interest rates returned to normal in 2002 we might have avoided the worst of the current mess (and might have seen a stronger more balanced recovery).

The issue today; many individuals do not take responsibility for their actions. With regards to the housing bubble, many homeowners agreed to certain loans; which if interest rates increased; would dramatically increase their payments. Many people just wanted to get into a home without thinking about the possible ramifications. And individuals today are much more willing to take a forclosure than they would have 20 or 30 years ago. This does present a serious problem. As soon as people begin taking responsiblity for their own decisions we will live in a far better place.

Well we are seeing oil drop below $125 for the first time since early June. However, we are still mired in slow economic growth. And surely the housing market will continue its slump as oil is not the only reason our country is currently in a gloomy state. However, since I do live in Texas we are seeing people from all over the country relocate here. It has put a strain on our http://houston1apartments.com (apartment market). Apartment rates here have increased substantially. There are many builders who continue to move forward with new construction and we will see what is in store for us in the future.