September 07, 2020
Our elites work hard to cover up for each other even if it means an almost Trumpian denial of reality. We got another taste of this effort in a New York Times piece on Joe Biden’s actions with regard to China over the years. The piece talks about the massive job loss of manufacturing jobs due to trade in China and then tells us the problem of the Great Recession was about the financial system:
“From 1999 to 2011, competition from China cost the United States more than two million factory jobs, according to academic research. In the midst of that, flaws in the U.S. financial system set off a global economic crisis. In 2008 and 2009, as Mr. Biden took the reins of the second most powerful office in the United States, the major G.M. and Chrysler plants in his state shuttered.”
In fact, the housing bubble had been driving the economy since 2002. It led a to massive construction boom, which collapsed when the bubble burst. It also led to a massive surge in consumption, as people spent based on their bubble created equity. When the bubble burst, there was nothing to replace a loss of annual demand in excess of 6.0 percent of GDP ($1.2 trillion in today’s economy). If the story was actually the financial crisis then the economy should have been close to normal by 2010 when most aspects of the financial system were operating just fine.
It is useful to policy types to perpetuate the myth that the problem was the financial crisis because finance can be complicated. We have all sorts of exotic financial instruments, many of which are not publicly recorded anywhere. Our policy elite decided that they could be forgiven for not keeping track of such a complex system.
By contrast, the housing bubble and its impact on the economy was easy to see. We saw an unprecedented run up in house prices, with no remotely corresponding increase in rents. Vacancy rates were hitting record highs. And, it was apparent from the GDP data, which is released every quarter, that this bubble was driving the economy.
It was 100 percent predictable that the bubble would burst and lead to a serious recession when it did. Unfortunately, this point is almost never made in polite circles because there is a great interest in pretending the story is complicated to excuse such an enormous policy failure.