Elites Demanding Austerity Also Ignored Housing Bubble
Elites Demanding Austerity Also Ignored Housing Bubble
… it was somewhat shocking to see a book review in The New York Times by Noam Scheiber, an editor at The New Republic, that longed for the day when we will have people who can use data to identify housing bubbles before they grow so large as to pose a serious danger to the economy.
The personal slight is beside the point; the issue is that our elites are being allowed to construct an alternative reality that absolves them of responsibility for the ruined lives all around us. The reality is that people in positions of authority chose to ignore the evidence of a rapidly growing bubble and those trying to call attention to the dangers it posed. Instead, we have Scheiber giving us the “Who could have known?” story. His case is that the dynamics of the bubble were just too complicated for people to grasp given the tools available at the time. The people who clearly warned of the bubble, using data, simply did not exist in Scheiber’s universe.
If it were just Scheiber saying this on a rant somewhere, he could be easily dismissed as a crank. While he is a prominent writer on policy and politics, prominent writers say ridiculous things all the times.
But this was not just a random rant. It was a book review in The New York Times, by far the nation’s most prestigious newspaper. It is a paper that employs fact checkers and prides itself on accuracy. Would The New York Times allow a book reviewer to bemoan the fact that no one had questioned the existence of weapons of mass destruction in Iraq prior to the war?
And the bubble warners were not entirely below The New York Times’ radar screen. In fact, several Times reporters had picked up on warnings of the housing bubble. In fact, Paul Krugman, perhaps the most famous economist in the world, used his New York Times column in 2002 to warn of the dangers posed by the housing bubble.
Given this history, how can an ill-informed book reviewer get away with making what is obviously an untrue assertion in a New York Times book review? The simple answer is that Scheiber’s “Who could have known?” story is quite comforting to people with power in this country.
Wynne Godley predicted it to a T, but admitted the timing part was tough to predict. He even described the exact mechanics.
Hyman Minsky’s Financial Instability Hypothesis described what happened to a T:
The Hypothesis———
Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.
The “hedge borrower” can make debt payments (covering interest and principal) from current cash flows from investments. For the “speculative borrower”, the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The “Ponzi borrower” borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.
If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments
Link to Hyman Minsky’s Hypothesis:
http://www.levyinstitute.org/pubs/wp74.pdf
Posted for coberly (log in trouble):
Scheiber wrote a book called The Real Deal, which was a collection of clever lies about Social Security.
One of the better ones was the “44 Trillion Dollar Deficit” which Scheiber actually admitted was “2%” of the economy over the same time, “still,” he said, “44 Trillion dollars is a lot of money.”
In other words, the United States is a big, rich country but we need to kill Social Security because it will cost the people who depend on the benefits an extra 2% out of each paycheck. And we can do this easily by getting them to panic about “44 Trillion Dollars of debt” instead of the extra forty cents per week per year it would ultimately cost them to pay for their own longer retirement.
Dean doesn’t begin to be harsh enough about Scheiber, but then I am only another one of those people who do not exist.
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mmcosker
thanks for this. i don’t know enough to evaluate it, but it would be great if there is “real economics” that explains how things work, as opposed to how they spozed to work.
Coberly Wynne Godley’s stuff is great, and not hard to undertsand.
Start with these two, both short.
1******
http://www.levyinstitute.org/pubs/pn_5_05.pdf
2******
http://www.levyinstitute.org/pubs/pn99_4.pdf
Here is a list of all pubs:
http://www.levyinstitute.org/publications/?auth=104
Wynne Godley is no slouch.
It mcw by the way – outed by the comment situation.
mm
will take a look. but will be out all day, so later.
Bubble? What bubble?
Nothing to see here.
http://www.ritholtz.com/blog/2009/07/update-case-shiller-100-year-chart/
It’s only a meteoric price rise form a 50 year long base.
JzB
The history and final demise of LTCM methodically foreshadowed the clear and present demise we face.