The View from the Rear View Mirror: A 'Ten Years After' Critique

October 05, 2018

CEPR’s senior economist Dean Baker argues in The Housing Bubble and the Great Recession: Ten Years Later that the Lehman event marks the peak of a recession caused by the collapse of the housing bubble. The media’s attention on the failure of Lehman Brothers as the driver of the recession to the exclusion of the bursting housing bubble reveals the class conflict apparent in how the Great Recession was, and still is, reported.

While the fear generated by politicians and media was able to get enough support for saving the financial industry, the country was left to deal with the painful fallout from a collapsed housing bubble. Millions lost their homes and jobs. Even a decade later, by some measures, most notably prime-age employment rates, the labor market has still not recovered.

“Sometimes, none are so blind as those who do not want to see.”

Baker saw the housing bubble and its potential to harm the economy as far back as 2002. Sixteen years after Baker’s first warning of the bubble, economist Jared Bernstein shouted out on the Washington Post, that Baker is “a rare economist who did see what was happening in real time.” Baker was clear even as far back as 2002, six years before Lehman, that the collapse of the housing bubble could cause a recession.

In a rare gesture of humility, the three guys in charge of shepherding the economy in 2008 — former Fed Reserve Board chair Ben Bernanke, Obama Treasury Secretary Timothy Geithner, and Bush Treasury Secretary Henry Paulson — admitted in the New York Times that they “completely failed to see the crisis coming” (but still managed to pat themselves on the back for a rescue job well done).

Housing Bubble to Lehman Bros: You’re nothing without me

The above-mentioned Bernanke, who missed the bubble, recently presented a paper elevating the final downturn as the dominant factor in pushing the economy into the abyss. Now the struggle is on for how the Great Recession will be viewed in the accounts of economic history.

Paul Krugman steps into the ring and presents the main event: “There’s an economic dispute underway about the causes of the Great Recession — but that’s not what’s weird. What’s so strange in these days and times is that it is being carried out among well-informed people who actually look at data and argue in good faith.”

For Baker, it helps to have Nobel economist and New York Times columnist Paul Krugman on your side: “Ben Bernanke wrote a paper arguing that the financial crisis and the resulting credit crunch were central to the Great Recession. I wrote a piece raising questions about that verdict; now Bernanke has replied to those questions. Dean Baker has already weighed in…He’s talking about steeper, while Dean and I are talking about deeper.”

Bailouts and TARPs and Stimulus, Oh My!

Baker is unequivocal: the bank bailout of 2008 was unnecessary. “The trio [Bernanke, Geithner, Paulson] argued to lawmakers that without the bailout, the United States faced a catastrophic collapse of the financial system and a second Great Depression. Neither part of that story was true.” The New York Times hailed the bailout gang as heroes.

The stimulus needed to pull the economy out of a nosedive, as viewed in the rear view mirror, is another matter still debated by economists ten years after. In our corner is Baker and Nobel economist Joseph Stiglitz. In the opposing corner is Larry Summers, Obama’s National Economic Council in 2008.

Speculation on all the what ifs abound. What if we bailed out Lehman? What if we didn’t bailout any banks? What if there was an alternative between bailout and no bailout?

Recession Anxiety

It shows the lack of understanding of the nature of the 2008–09 crisis that so many people are now seeing potential crises in areas where they clearly do not exist. It suggests that we have yet to learn the lessons of the 2008-09 crisis.

Baker’s The Housing Bubble offers lessons in the 2008–09 crisis. But if you didn’t catch those lessons the first time around, Baker offers variations in Beat the Press blog:

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