The Fundamentals of the Housing Crisis Were Not Complicated

Economist Dean Baker makes an excellent point about the supposed complexity of the housing crisis:

There are some very basic points here that everyone should understand. The details of any form of regulation will be "complicated." For example, the actual fire safety rules for schools are undoubtedly very complicated. How many of us could write up the appropriate safeguards to ensure that our children will be protected from fire risks as they study? Similarly, the safety rules that are necessary to ensure that our food is not contaminated would also require background that very few of us have.

Nonetheless, there are very few people who would therefore question the need for school fire safety regulation or food safety regulation. NPR is doing cover-up for the financial industry and inept and/or corrupt policymakers and regulators when it tells us that the issues are complicated.

The basic issues were extremely simple. There was a massive asset bubble that created $8 trillion in illusory housing wealth. The collapse of this bubble was going to lead to an economic disaster. This was simple, really simple, and any competent economic analyst could see it coming.

This bubble was being supported by a flood of really poorly written loans that would go bad at huge rates when the bubble burst, leading to massive losses. This was simple, really simple, and any competent economic analyst could see it coming....

NPR implied that a housing bubble was allowed to grow to enormously dangerous levels because everything was so complicated as opposed to the possibility that those in charge were either corrupt and/or incompetent.

I also liked this bonus snark (italics mine):

How do we prevent such a disaster again? We tell the Federal Reserve Board that part of its job is to combat asset bubbles. We tell them that Alan Greenspan was wrong in thinking that asset bubbles are really cute. It would probably be good to fire some of the people at the Fed who didn't warn of an $8 trillion housing bubble, just so that they know we are serious....

The basic story is that we do know how to prevent asset bubbles and we do know how to prevent a flood of deceptive loans that are virtually certain to default. It is also true that the regulations absolutely will not be perfect and in that sense it will slow growth. So what? The placement of traffic signals is not perfect and therefore slows growth.

We never do anything perfectly, that includes financial regulation. Does NPR have any evidence that the risks to growth of bad regulation are larger than the risks of misplaced traffic signals? If so, that would be an interesting piece for listeners.

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[pedantic]Your second quote is missing italics[/pedantic]

By Who Cares (not verified) on 12 Apr 2009 #permalink

Greenspan's problem was that he didn't remember what Greenspan said in 1996: "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions..."

By natural cynic (not verified) on 12 Apr 2009 #permalink

@Who Cares, [pedantic]Your name doesn't match your level of detail[/pedantic]