Responsibilities

What does that [the existing, 2007-08-09, economic downturn] say about the field of economics, which claims to be a science?

It’s an enormous blot on the reputation of the profession. There are thousands of economists. Most of them teach. And most of them teach a theoretical framework that has been shown to be fundamentally useless.

James Galbraith

Interview by DEBORAH SOLOMON
New York Times Magazine, Published: October 31, 2008.

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, DC.

He writes:

"Here the ranking of the presidential terms since 1950 by average annual GDP growth:

"President Bush's growth record is better than his father's, but it is worse than the record of every other president in the last half century."

Actually, from a strict economic perspective President Bush is absolutely responsible for the fallout from the collapse of the housing bubble. Competent economists recognized the bubble and warned of the harm that would come from its inevitable collapse. President Bush absolutely can be blamed for the fact that he chose to ignore the bubble or that his economic team failed to recognize it.

The fact that the NYT found a Republican economist who would not hold President Bush responsible for the bubble does not make a compelling case for his innocence. It is also important to note that President Bush was eager to claim credit for the growth created by the expansion of the bubble (and the NYT was anxious to give it), therefore it is difficult to see any reason that he should not be blamed for the recession created by its collapse.

--Dean Baker

Posted by Dean Baker on January 27, 2008 9:59 PM

Financial free-fall or commercial credit meltdown?

They allowed an $8 trillion housing bubble ($110,000 for every homeowner) to grow unchecked. People like Henry Paulson, Ben Bernanke, and Alan Greenspan repeatedly insisted that there was no housing bubble as house prices got ever further out of line with fundamentals. President Bush regularly boasted about record rates of homeownership as the sleazes at outfits like Countrywide, IndyMac, and New Century pushed predatory mortgages on moderate income families, many of whom were black or Hispanic.

It just took a little common sense to see that a disaster was imminent, even if the exact timing and course could not be predicted. But, our elites lacked commonsense, and that is why we now face such a dire economic situation.

The main cause of the economy's weakness is not insolvent banks and lack of credit; it's the loss of $4 trillion to $5 trillion in housing equity as a result of the bubble's partial deflation. Families used their equity to support their consumption in the years from 2002 to 2007, as the savings rate fell to almost zero.

With much of this equity now eliminated by the collapse of the bubble, many families can no longer sustain their levels of consumption. The main reason that banks won't lend to these families is that they no longer have home equity to serve as collateral. It wouldn't matter how much money the banks had, they are not going to make mortgage loans to people who have no equity.

And house prices are not going to come back. This is like Pets.com. We are not going to get the price of $200,000 homes in central California back up to $500,000.

The main problem in recovering from the recession will be finding ways to boost demand other than household consumption. In the longer run, this will mean reducing imports and increasing exports. In the short-run, we will have to rely on government stimulus to help spur growth and reduce unemployment. The Democratic demands for stimulus were not extraneous to the legitimate goal of a bank bailout bill. Fiscal stimulus must be central to any serious effort to boost the economy. The weakness of the banks contributes to the downturn, but they are not the core of the problem. We would still be facing a recession even if all our banks were flush with cash.?

. . . .

"But the basic story – that there was a housing bubble that would burst, and that it would cause enormous damage to the economy – was completely knowable to any competent economist long ago. The failure of the economists at the Fed, as well as the vast majority of the economists elsewhere, to see the housing bubble and to recognize the damage that would be caused by its collapse is a testament to the failure of the profession.

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."

"Greenspan Says 'Who Could Have Known?' ” by Dean Baker. October 27, 2008, Truthout

Henry Paulson, Secretary of the Treasury appointed by the Presidency and confirmed by Congress.

Ben Bernanke, Rederal Reserve Board Chair (Congress and the Presidency).

Alan Greenspan's myopic ideology (Ayn Rand) and meaningless mea culpa.

ideology of Objectivism

"A government is the most dangerous threat to man's rights: it holds a legal monopoly on the use of physical force against legally disarmed victims.

Achievement of your happiness is the only moral purpose of your life, and that happiness, not pain or mindless self-indulgence, is the proof of your moral integrity, since it is the proof and the result of your loyalty to the achievement of your values."

Ayn Rand

As a frequent guest on National Public Radio, he is also on Marketplace, CNN, CNBC and other news programs. He is the author of several books, including The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer and The United States Since 1980.

He received his Ph.D. in economics from the University of Michigan.

CEPR was co-founded by economists Dean Baker and Mark Weisbrot. Our Advisory Board of Economists includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.

Willingness to pay.

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