1 Boring Old Man

Greenspan Says, "Who Could Have Known?"
by: Dean Baker
t·r·u·t·h·o·u·t | Perspective

That’s right, the former Maestro told Congress last week, when asked about the meltdown of the housing bubble and the resulting financial crisis, "we’re not smart enough as people. We just cannot see events that far in advance." Unfortunately, this sentence is even worse in context. Greenspan told the committee about the brilliant economists on staff at the Federal Reserve Board. His point was that if this group could not see the housing bubble, and the risks it posed to the economy, then it was not humanly possible to see it.

The reality is that it was possible – in fact, easy – to recognize the housing bubble as early as the summer of 2002. House prices nationwide had substantially outpaced inflation in the years since 1996 (coinciding with the stock bubble) after just tracking the rate of inflation for the prior hundred years. There was nothing in the fundamentals of supply or demand that could explain this run-up. Furthermore, there was no corresponding increase in rents. Since people always have the choice to buy or rent, house sale prices and rents should rise and fall together over time, although not necessarily at the exact same pace. In the years since 1996, rents had only modestly outpaced inflation. And they had begun dropping in real terms by 2002. This was not consistent with house prices being driven by fundamentals.

It was also easy to see that the collapse of the housing bubble would cause enormous damage to the economy. Housing itself accounted for more than 6 percent of GDP at the peak of the boom in 2006. Today, it accounts for just over 3 percent…

Greenspan’s claim that the crisis was not foreseeable is a cover-up for a profession that has badly failed the public. If factory workers or custodians had failed so miserably in their jobs, they would quickly find themselves unemployed. Remarkably, in economics, the people responsible for this easily preventable disaster are suffering no negative consequences and, in fact, are still the ones designing the nation’s economic policies. Economists believe that if workers are not held accountable for their performance, then they will not do good work. If economists are not held accountable for their performance, then we should not expect good economic policy.

Contrary to what Greenspan told Congress, "we" are smart enough as people to see asset bubbles like the housing bubble. If his "we" are not smart enough, as he claims, then the current group of economic policymakers must be replaced with people qualified to do the job.

But I have no problem blaming the Bush Administration [for almost any and everything]. It’s just not possible that somewhere down the line, someone mentioned the "housing bubble," "the subprime mortgages," or the "derivative market" to George W. Bush or Dick Cheney. It reminds me of the 911 attack on New York. Richard Clarke and others handed the warnings to our leaders on a platter plenty enough times – only to be ignored. I’m sure the same thing happened with this problem. These fools preach the gospel of pre-emptive strikes, but haven’t even made an effort to be aware of what’s going on in the country. And I’m willing to bet that Bush’s comments when the Market went down that our "fundamentals" were solid was something some speechwriter threw on the teleprompter, rather than being based on any foreknowledge of what the problem actually entailed or what "fundamentals" even means in relation to our economy. Our "fundamentals" fundamentally sucked on the day he said it [and for a long time before].

What’s hard to get our minds around is that we currently live under a form of government that’s fundamentally anarchy. The Bush Administration has reacted to problems only after they’ve flowered, not before. Then they do something dramatic, they do something emphatically dramatic, and then go back to sleep. So we have a war, or an economic stimulus package, or a Brownie, or a Surge, or a bailout package. But we have no "government" looking over things, anticipating problems, thinking through solutions. This cataclysmic financial crisis just happened one day, and all of a sudden we had to pass some gigantic bailout plan, and by all indicators so far – it was totally ineffective. And President Bush comes out and says, as usual, that he has "faith" in his solution du jour.