April 06, 2013
The Washington Post has a lengthy piece discussing the new Office of Financial Research that was set up as part of Dodd-Frank. The purpose of the office is ostensibly to prevent another financial crisis. The article focuses on the supposedly brilliant people who are staffing or advising the office and sophisticated tools that they intend to use on their job.
In fact, it was only necessary to have someone familiar with basic arithmetic and economics to prevent this crisis. It was easy to see that house prices had become grossly out of line with economic fundamentals during the bubble years. It was also easy to see that this bubble was driving the economy as residential construction rose to record shares of GDP and the wealth from bubble generated housing equity pushed consumption to record shares of disposable income.
The collapse of this bubble was the basis for the crisis. If we had seen all the same crazy financial schemes without the bubble, the consequences of their implosion for the economy would have been minimal. By contrast, if the bubble had grown to the same level without crazy financing, its collapse would have still led to a severe recession.
There are many people in positions of power and authority who like to focus on the financial aspects of the crisis because it makes it appear complicated and gives them an excuse for having failed to recognize it in advance and taking steps to stop it. The reality is that it was all very simple and the people in positions of responsibility were simply too incompetent and/or corrupt to do anything to prevent this disaster.
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