Economist Addresses Rise and Demise of Housing Bubble in Levitt Lecture

Dean Baker
Dean Baker
Co-director of the Center for Economic and Policy Research in Washington, D.C., Dean Baker presented a lecture titled “Economic Origins and the Way Out” on Wednesday evening in the Chapel. The lecture opened The Arthur Levitt Public Affairs Center’s 2009-10 series, “Crisis: Danger and Opportunity.” 

Baker outlined his presentation by providing answers for three questions crucial to understanding the “rise and demise of the housing bubble”: how we got here, who was to blame, and how we get out.

First, Baker delineated housing price trends between the years 1950 and 1996, a period of time in which housing prices stayed relatively on par with the rate of inflation. However, in 1996, housing prices took a “sharp divergence from historical trend” and more than doubled. Baker explained common theories that were thought to drive the spike in housing prices, such as income and population growth, environmental restriction, and limited supply of desirable land.
However, these theories were not entirely plausible explanations for spurring the housing bubble. Instead, he targeted the “stock bubble” as the reason for driving up house prices. As he explained, in 1996 people had more stock and wanted to buy newer, larger houses. As a result, housing prices rose but never increased in value over time. This “self-reinforcing” cycle led to the housing bubble. At the time, Baker explained, the bubble drove the economy by huge increases in construction with 6.5% GDP in 2005. By the time of the crash, however, housing prices had fallen by 3% followed by a loss of 6 to 8 trillion dollars in housing wealth. 

According to Baker, the housing bubble was easy to identify and should have been easy to prevent. He believes that Alan Greenspan, former Chairman of the Federal Reserve, should have exhuasted all of his resources to document and warn about the bubble. He also believes the Federal Reserve should have cracked down on bad mortgages and over-leverage, and as a last resort, raised interest rates. 

Finally, Baker offered approaches for how the government can “get out” of our current economic crisis. In the short term, he asserts that the government must spend money. For the long term, it must get the dollar down in order to make trade closer to balance, as “we cannot have an economic running on a trade defecit for a long period of time”. As far as prevention, Baker suggests we fire the regulators who failed to properly warn about the bubble. Also, we must downsize the financial industry by implementing a financial transaction tax as well strengthen the power of shareholders by binding votes on compensation.

Baker is frequently cited in economics reporting in major media outlets, including The New York Times, Washington Post, CNN, CNBC, and National Public Radio. He writes a weekly column for the Guardian Unlimited (UK), and his blog, “Beat the Press,” features commentary on economic reporting. 

His analyses have appeared in many major publications, including the Atlantic Monthly, The Washington Post, the London Financial Times, and the New York Daily News. Baker has written several books, most recently Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint Press, 2009). His book Getting Prices Right: the Debate Over the Consumer Price Index (editor, M.E. Sharpe, 1997) was a winner of a Choice Book Award as one of the outstanding academic books of the year.
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