This Crisis Was Completely Predictable, Unlike What Greg Mankiw Says

I don’t always agree with economist Dean Baker. For one thing, he appears to believe that the risks associated with high budget deficits are overstated, especially when economic circumstances are as dire as they are now, even though evidence suggests that may not be the case. He also seems to think that Chinese purchases of U.S. government bonds do not keep our rates lower than they might otherwise be, despite the fact that scholarly analysis indicates otherwise.

That said, I think he is largely on the mark in his criticism of one well known economist in a post at his Beat the Press blog, entitled “Sorry Greg, This Crisis Was Completely Predictable and Predicted”:

Gregory Mankiw uses his NYT column today to give us an explicit “who could have known?” about the economy crisis. He tells readers that: “fluctuations in economic activity are largely unpredictable.”

No, this crisis was completely predictable. The problem was that the leading lights in the economics profession completely missed the boat and are now using their platforms to tell the public that it wasn’t their fault.

The basic story was and is the housing bubble. How could they miss an $8 trillion housing bubble? What were they smoking?

We have a hundred year long trend, from 1895 to 1995, when nationwide house prices just track the overall rate of inflation. Suddenly in the mid-90s, coinciding with the stock bubble, house prices begin to hugely outpace inflation.

The run up in prices cannot be explained by any obvious shifts in the fundamentals of supply and demand. Furthermore there is no remotely corresponding increase in real rents. And, the vacancy rate for housing rises to record levels.

If economists could not see this bubble, then they should look for another line of work. Sorry, this fluctuation was entirely predictable. The people whose job responsibilities including recognizing a dangerous bubble like this one just blew it completely. It speaks volumes about the nature of the U.S. economy that almost all of those people still have their jobs, unlike the tens of millions of other workers who lost their jobs or can only work part-time because of the incompetence of the economists.

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Comment by DJ Curcio

2009-05-25 00:19:38

Yes sir - nothing like having to listen to idiot high paid economists still balthering their gsrbage.
Heck, I onw the only honest mortgage broekrage in Las Vegas and was screaming about all the crap loans my competition was doing for years to the Fed and the regulators, and to the media. I got laughed off the air.
Stipid me for having integrity.

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