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The US Housing Bubble and Aftermath: Economist Dean Baker's Account of What Should Have Been Done

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Alan Greenspan should have led economists to document the potential harm of the bubble, and burst it early, before it could destroy and/or allow the theft of $7 trillion of wealth, and thereby ruin tens of millions of lives.

What happened is straightforward:   we had a huge run-up in house prices that was anomalous.   After 100 years in which nationwide house prices kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.

 

By 2002, when the bubble began to form, house prices had already risen by more than 30% in excess of inflation.   By the peak of the bubble in 2006, the median increase in house prices was more than 70% above the rate of inflation.   This was clearly and pronouncedly a bubble, and should have been publicly labeled as such by those in charge of monitoring, regulating and protecting our economy.   But too many people were making big money from it.

 

Nevertheless, here was a huge problem and a huge danger  

 

Why?   Because this bubble was clearly driving our economy.   It drove the economy by creating a boom in residential housing construction.   We were building housing at near record pace in the years 2002-2006.   And this in spite of the fact that we had record levels of vacancies even at the beginning of that period, and an aging population that would soon be able to ill afford the purchase of any of this newly created housing.

 

The other way in which the bubble was driving the economy was through its effect on consumption.   The growing bubble created more than $8 trillion in ephemeral wealth -- in inflated housing values.   Homeowners thought this wealth was real and spent accordingly, many using their home as a kind of ATM machine.   The result was a massive consumption boom.

 

When the bubble burst, the building boom went bust.   Construction fell to its lowest levels since the 1950s, as the country waited to gradually work off a glut of housing.   As a result, consumption fell back to more normal levels, as people realized that they had lost tens of thousands of dollars of equity in their home.

 

The combined effect of:

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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