Economist Dean Baker warned of a housing bubble collapse that could threaten the economy as early as 2002. As the tenth anniversary of the failure of Lehman Brothers marks the peak of a recession caused by the collapse of the housing bubble, Baker sets the record straight with a complete anatomy of the housing bubble, the recession, the enormous policy failure leading up to 2008, as well as what can and should be learned about economy-threatening bubbles.
“The Housing Bubble and the Great Recession: Ten Years Later,” by Dean Baker and released by the Center for Economic and Policy Research (CEPR) argues that the primary cause of the downturn was a collapsed housing bubble, not the financial crisis. To ignore the main cause of the Great Recession “obscures the extent of the enormous policy failure leading up to 2008 and misdirects the focus of policy going forward,” said Baker.
The housing bubble and the risks it posed were easy to see, as Baker did as early as 2002, when he noted the unprecedented run-up in house prices with no plausible explanation within the fundamentals of the housing market. Baker attributes the failure to see a bubble-induced economic crisis to the “incredibly narrow-minded thinking [of] the vast majority of the economics profession.”
Baker backs-up that critique of economic thinking by looking at the 2001 collapse of the stock market bubble. The failure to recognize the severity of the downturn following that collapse bolstered the conventional view in the economics profession at the time that the collapse of a bubble is easy to handle.
To quell recent warnings of another financial crisis found in the media, Baker emphatically states “there is no imminent crisis that is at all comparable.” No dangerous bubble exists today or is on the horizon.
The lessons contained in “The Housing Bubble and the Great Recession: Ten Years Later” can ensure that future dangerous bubbles like the housing bubble will not slide by under the radar. “If bubbles are big enough for their collapse to severely damage the economy, they are big enough to be seen,” said Baker.