I Tried to Warn Ed
Actually I did. Ed didn't tell me that he was thinking of taking out an Alt-A loan, but I did try to warn Ed and everyone else in sight about the housing bubble. We even ran an essay contest offering $1,000 for the best essay arguing that there was no housing bubble which got written up in Ed's newspaper (twice). Needless to say, Ed didn't listen, but more importantly Alan Greenspan and the other great minds in the economics profession didn't listen.
Ed will have to deal with his loan officer, but what about all the other folks who somehow could not see an $8 trillion housing bubble expanding in front of their face? What sort of economic system do we have when you can drive your bank into the ground peddling these garbage loans and still have a job the next day?
How about the economists who insisted that everything was fine? The U.S. housing market is (or was) a $20 trillion market. How can you claim to know anything about the U.S. economy when you can't recognize when a $20 trillion market is 70 percent above its trend levels. This is not rocket science. It is really really simple arithmetic.
For a 100 years house prices nationwide just tracked the overall rate of inflation. 100 years, 100 years, 100 years, just keep repeating that. 100 years is a really long trend, about as long as you can say anything meaningful in economics. Yet the boys and girls at the Fed, at the Treasury, at M.I.T., at Harvard, at Princeton etc. somehow could not see an enormous divergence from trend prices in the world's largest market.
How could anyone who claims to know anything about economics (e.g. passed an intro) have missed this one? The huge neon lights were everywhere. There were millions of people, like Ed, who obviously could not afford the mortgages they were getting. If your job was knowing the housing market, or the economy, and you didn't see this crisis coming, then it's hard to imagine what you could see.
The result of their blindness to the obvious was that millions of people, most much less educated in these matters than Ed, are losing their homes. Tens of millions are approaching retirement with almost nothing saved because they listened to the economists who told them that their housing bubble wealth was real wealth, and therefore saw no reason to save. Even worse, perhaps 10 million people will go unemployed because the folks who are paid to know the economy didn't.
To my mind, the most tragic part of this story is the lack of consequence for the folks who could and should have prevented this disaster. Many are still earning tens of millions a year on Wall Street. Some hold top positions in government. Others are still routinely cited as experts on the housing market and the economy in major media outlets.
We leave in a sharply divided country. It is not only divided between rich and poor; it is also divided between those who are held accountable for the quality of their work and those who are not held accountable.
In the former group we find people like dishwashers, custodians, and truck drivers. In the latter group we find people like bankers, Federal Reserve Board governors and economists. Under the current system, the former group of workers suffer not only for their own mistakes but also for the mistakes of their more educated brethren who are never held accountable for the quality of their work.
The worst part of this story is not just that they screwed us once. Rather, the worst part of this story is that they are going to do it again.
[This was delayed about 12 hours due to Verizon.]
I think the problem, Dean, is that these trends aren't steady, they're bumpy and choppy and they're not timeable. So the best thing to do is to stay out of the market entirely. But you can't, really... not if you'd like to own a home and escape the often abusive rental markets.
Also, you could have said the same to people who bought stocks, either during the dotcom bubble or who held on for the recovery when the Dow peaked again in 2007. They should have just seen simply that the trend lines were out of whack and stayed out of the market. Except you really can't do that if you're retirement planning... because you run the risk of running into bonds, taking too low a return and never retiring.
Besides, the trends are never entirely clear. There are always tons of indicators around. You're right, we should expect more of Greenspan, Bernanke and Pandit and Dimon but don't act like this is all so simple -- as soon as we do that, we start blaming ordinary people.
June 23, 2009 5:31 PM | Reply | Permalink
Destor,
i did warn people about the stock bubble -- beginning in 1997. if you just wanted to gamble and get out, you could win, but long-term investors were sure losers. It should have been easy for an economist to see. I don't blame ordinary investors who don't follow the market for living.
June 23, 2009 5:56 PM | Reply | Permalink
Dean, good on you for warning people about that. But I wonder what the retail or 401(k) investor was really supposed to do, especially with the financial punditry aligned to warn them to not to try to time the market and to hold on for the long haul. There's a lot of contradictory investing information out there and it's hard for people to tell who's right.
The other problem is... what if you're wrong on a big call? You have a great track record but nobody's right all the time.
June 23, 2009 6:45 PM | Reply | Permalink
Dean, how much further do housing prices need to fall, from their current levels, to revert to the mean -- to get back on that 100-year trend line of inflation?
And do you think that they will likely fall below the trend line for some period of time first, before returning to trend? (Seems likely to me.)
Or will we be able to re-inflate the bubble, somehow? (Seems that's what some people want.)
-- ARG
June 24, 2009 11:14 AM | Reply | Permalink
Destor,
You're right that trends are choppy and impossible to predict with any precision. And if you're a homebuyer, chances are a house looks expensive regardless of what year you buy it.
But Dean and a handful of others weren't making a case about precise market-timing.
They were arguing that the fundamentals were badly out of whack, that housing prices had been climbing much faster than income and inflation. David Rosenberg of Merrill Lynch (of all places), published a report in 2004 with the picture of huge bubbles floating up in front of a McMansion.
Even with Greenspan's low interest rates in 2004, people were spending more and more of their income on housing. By 2004, it had already been going on for years. It wasn't sustainable.
And Dean, I WAS listening to your warnings at the time. I vividly remember the day you told me you had just sold your condo out of personal conviction. I was in the process of buying my house, and my heart sank.
June 23, 2009 7:14 PM | Reply | Permalink
Your problem, it seems to me, isn't that you bought a house when you did (Dean sold his Spring '04 and left two years of price appreciation on the table) but that you gambled that the joint income you anticipated would actually be realized. When it didn't materialize, you were up the creek without a paddle.
That sinking feeling you felt in '04? All cured by '05 as home prices continued to rise.
Dean's a nice guy but he ain't a genius.
June 23, 2009 8:18 PM | Reply | Permalink
Depends on how you define genius.
June 24, 2009 1:40 PM | Reply | Permalink
June 23, 2009 8:26 PM | Reply | Permalink
It is just so darn BORING to live within one's means. But, get used to it, folks, because credit isn't going to be easy for a looooonnnnggg time.
June 23, 2009 9:21 PM | Reply | Permalink
My experience certainly isn’t a scientific sampling about why people refused to accept that a housing bubble would destroy their finances and dreams of status.
I was following what Dean Baker was saying and I was following his web site’s calculator about how much houses were over-valued in most American cities. So, I tried to do my good deeds and tell people that were about to buy a house and tell people that were running housing programs.
Almost every time, they would say something like, “That’s nuts! That means that I would lose $30,000 on my new house”. Or, most often, it was, “It won’t happen here. We have too much wealth and we are insulated”. Actually, they came up with several excuses, but really, they repeatedly said things that meant that they were excited about the image of living the high life. If someone talked about being frugal and saving, they were ridiculed. It wasn’t just houses either; it was cars and boats and whatever else the banks and credit union could push off onto them; or really I strongly suspect that it was whatever would make consumers feel like they have status. Conspicuous consumption was and is such a prominent landmark, few can resist not following those social demands upon their egos.
But, for sure the banks and credit unions did their part. Before we were married, the credit union tried to persuade my wife into a home loan for $150,000 more than she needed or could afford.
Oh, the guy that ridiculed the idea of losing $30,000 has lost more than $100,000, but he still doesn’t accept all of it because even though my hometown has more than 22 months of unsold housing inventory, the realtors still will not lower prices to match reality.
Bob Spencer
June 23, 2009 9:43 PM | Reply | Permalink
Bob,
I had the same impression during that period. Being frugal was boring and being "clever'' with borrowing was kind of cool.
But a lot of people simply felt they HAD to buy a house. If they waited, the price would just climb higher and be even more out of reach.
June 23, 2009 10:43 PM | Reply | Permalink
Yes----A couple years before the bubble began to deflate, I remember having the same thoughts about now-or-never to make an investment that will produce asset security.
In fact, well-meaning people thought that the rising house prices were a way for low income and hourly workers to escape poverty. A significant number of non-profits and some banks were reading scholarly materials about how building assets is a very important part of an anti-poverty strategy. I know that Wachovia conducted financial literacy classes for hourly workers and they had staff whose job was to coach people through the process and to learn how to plan for their financial stability and growth. I believe they were sincere.
The problem was that the excitement of the times inhibited most of those well-meaning people from concentrating and seeing that building assets includes much more than just taking the risk to buy a house. That excitement of the time caused people in many walks of life to not concentrate, and especially, it caused scholars and non-profit leaders and even the well meaning bankers to not dare to break with the style of the time and warn people to be more careful. They did not want, at all, to listen to someone like Dean Baker.
Bob
June 24, 2009 7:21 AM | Reply | Permalink
What Dean is talking about:
Divisions in a society, both past and present, income and accountability. Dean doesn't say just how we're going to get screwed again. Maybe he will say more.
"divided we fall"
June 23, 2009 10:59 PM | Reply | Permalink
As individual home buyers and/or stock investors we are mostly happy in bubbles and don't want to hear bad news. Even if most realize there is a bubble we figure we are nimble enough to bail before if not at the top. Nothing new there. But this bubble wasn't just in the private sector. A major contributer was the government's tax laws. Steep cuts in capital gains and dividend taxes pumped the stock bubble. Broad expansion of the capital gains tax exclusion on home sales pumped the real estate bubble further. Why? It kept the electorate fat and happy or at least perpetuated the illusion. It even helped fill the coffers with tax revenue from the transient jump in capital sales prices.
Like all burst bubbles, the party ends and the hangover sucks. This one is a doozie.
June 24, 2009 1:02 AM | Reply | Permalink
I think that we'll be screwed again is a very real probability, if not a forgone conclusion.
The comingling of government and the private sector assures this. Unless some change comes about that comprehensively isolates government from inappropriate private sector influence I don't see a way to avoid it. There is an assembly of forces, fairly evenly split, on both sides of this doing battle as we speak. The best we'll get is a hopelessly inadequate compromise. I think the slant toward the inadequate is gaining ground.
June 24, 2009 7:12 AM | Reply | Permalink
not that it's terribly important, but I actually did come very close to the peak in selling my condo. The guy who bought it tried to resell it in early 2006. He listed it at a price about 15 percent more than he had paid. It didn't sell.
He then went with another agent and listed at a price about 10 percent higher. It didn't sell that time either. I believe that he is now renting to someone.
Anyhow, I never expected that we would have gotten the peak, but given that our buyer must have put $10k-$20k of work into the unit, it doesn't look as though the price went much higher after we sold.
FWIW, we bought a place last month. I don't think we got the trough, although we did catch mortgage rates at their bottom.
June 24, 2009 3:24 PM | Reply | Permalink
Maybe the guy you sold it to kept cats.
June 24, 2009 4:44 PM | Reply | Permalink