In fact, it didn’t even require much in the way of theory. As financial reform legislation moves its way through the legislative process, we’re going to hear a lot of claims along the line of “No one could have predicted this.”
Which makes me wonder if we’re going to militarily occupy Wall Street for a decade too. Of course, this is bullshit, and economist Dean Baker calls out this ersatz ‘consensus’:
Yeah, it’s all really really complicated. Except it isn’t.
Nationwide house prices had diverged from a 100-year long trend, increasing by more than 70 percent in real terms. There was no remotely plausible explanation for this run-up. What is hard to to understand to about this? What is complicated? Third grade arithmetic was all that was needed. It’s simple, not complicated.
The follow on effects were also pretty obvious:
The run-up in house prices was driving the economy. This was also really easy to see. The government publishes GDP data every quarter. The data showed that housing construction had exploded as a share of the economy. You just had to look at the data. It’s simple, not complicated.
The data also showed that consumption was booming and savings had fallen to near zero. This was driven by the well-known housing wealth effect. It’s simple, not complicated.
It was also easy to see the explosion in subprime and Alt-A loans that people were using to buy homes they could not otherwise afford. These loans were sure to reset at higher interest rates. This works until house prices stop rising. It’s simple, not complicated.
And, it was easy to see that house prices would stop rising. Vacancy rates were running at record levels. There is a concept called “supply and demand” in economics and the data showed that we had serious amounts of excess supply. It’s simple, not complicated.
And when house prices started to fall, we knew that millions of loans would go bad, construction would plummet and consumption would fall back to more normal levels. This implied a really bad recession and serious financial problems. It’s simple, not complicated.
And while Dean Baker, to the best of my knowledge, was the first to call this in early 2000, others like Paul Krugman soon joined in. A few years later, many in finance realized that this was happening, but they couldn’t afford to not go along (and just hope they got out in time).
Just like Iraq, we’re going to hear the following:
1) No one could have predicted any of this.
2) We were wrong for the right reasons.
3) ‘They’ (e.g., Dean Baker) were right for the wrong reasons. Like looking at data instead of doing hard, tumescent theory.
And just like Iraq, they’re covering up their own ineptitude.