Dear Friends of CEPR,
I have a new book out this month: False Profits: Recovering from the Bubble Economy. I felt the need to write this book because, remarkably, the people who somehow could not see an $8 trillion housing bubble still could not understand the bubble even after it wrecked the economy. It was as though their house had burnt down in a fire and they were checking on the burglar alarm.

There is not a lot of mystery as to the source of the current problems. First and foremost, the country's top regulators, Alan Greenspan and Ben Bernanke, were incredibly incompetent in allowing the bubble to grow unchecked. This bubble drove the economy ever since the last recession. Predictably, high house prices led to an enormous construction boom. Soaring home equity also led to a massive consumption boom as people spent based on the newly created wealth in their homes.

fp-2In its later years, the bubble was further inflated through complex financial engineering and, in some cases, outright fraud by the financial industry. While it would be desirable to have a better regulatory structure and it is important to fully prosecute the high level bankers who violated the law, this should not obscure the fact that the basic problem was very simple: the Fed committed one of the biggest policy blunders of all-time by allowing the bubble to expand unchecked.

At this point, we have to push for the measures that will best help us recover from the disaster that Greenspan/Bernanke created. At the top of the list is getting people back to work. Second, we have to help the homeowners who got caught up in the bubble. Finally, we have to rein in our bloated financial sector. There are other simple policy solutions to what, in many cases, are actually simple problems. But there is a whole industry of professional lobbyists, many of them economists, whose  job is to make simple problems appear complicated.

False Profits, like my other writing, is an effort to assure people that the problems and solutions really are simple. That may put me at odds with many of the leading names in the economics profession. But, when it came to the bubble, most of them were wrong. I hope False Profits will help them better understand what caused, and how to cure, the current crisis.  And I hope you'll find it a worthwhile read also.


Dean Baker