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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