Thank you for this post. The incessant cheer leading for the incompetent idiots who aided and abetted the bubble and then bailed out the miscreants who profited from it is making me ill.

we gave inspectors merit pay
for bending rules cleverly,
left derelict structures to ruin
along alleys spilling fuel.
when came conflagration
with that same fiery zeal
we proclaimed "our town
is proudest of how quick
we can ring the bell five times
but there's no secret trick to it,
you only need to guarantee
the smoke is thick enough to see"

Very good paper! I knew you called the bubble early, but had not read this particular paper. Thanks for posting a link to it. It would be interesting to overlay a graph of the obesity rate (or other "bubble" related phenomena) on one of those charts. ;-)

When you reach a certain level in American society, you just can't screw up badly enough.
Once are in the club, the club will hastily and discretely sweep up after you.

Lied about the reasons for war? Completely botched economic policy? No problem! Great job, Brownie!

There are real reasons why we are not likely to have another Great Depression this time, and they have little to do with the current governing crowd of incompetents and finance industry lackeys or any recent discoveries by economists. Because of New Deal reforms, we have deposit insurance and other things which prevent bank runs. We do have regulatory agencies such as the SEC which have not been completely gutted yet.

The mere size of government puts a brake on the business cycle in both directions, since government decisions are not made solely for pro-cyclic reasons.

If the same people remain in power we will regress back to how it was in 1929 and the next time there may be a Great Depression.

What's particularly galling about leonhardt's peice is that it once again confuses and conflates Wall St. and its sister, the stock market, with the real economy. What has essentially happened is that the gov't has bailed out wall street, and everyone in positions of power and influence are clapping their hands and saying, job done. Meanwhile, the real economy is moribund, continuing to deteriorate, and there is no evidence of a 'recovery' in sight, though one day, yes, it will stop getting worse.
But this is exactly the confusion that has infected gov't policy and public perception for the last thirty years: the stock market is NOT the real economy. It's related, but directing policy only at the equity markets is a fundamentally distorted route to economic investment. It's bubble economic thinking masquerading as real economic policy once again.
And of course leonhardt is particularly silly to be giving out trophies at the moment because the fact is no one knows what the next couple of years will bring. There are plenty of reasons why the present 'calm' in financial markets could turn ugly again: continuing explosions of atl-a and prime mortgages, crashing commericial real estate, an disorderly decline of the dollar, an implosion in Eastern Europe. And then we'll once again be staring at "crisis" in the headlines, and the real economy will begin to deteriorate even more rapidly again.

Things would have been completely different if you leftists hadn't conspired with the fake science producing scientistic economists to effectively ban Hayekian macroeconomics from academic economics and public discourse.

BIS chief economist William White nailed this this, and were speaking out about the misdirection of capital as early as 2003.

Scientistic macroeconomists and leftist economists are STILL slandering the macro that explained what was happening at the global level -- slanders universally grounded in a demonstrably incompetent understanding of this rival to there own failed macroeconomic research program.

Re: This crash was 100 percent preventable to anyone watching the economy and capable or doing 3rd grade arithmetic. The housing bubble was easy to see and it should have been obvious that its collapse would devastate the economy.

I've said this before, but I don't know if anyone in the history of anything has ever so milked getting one call right. I'm not familiar with the body of Dean's work, but I have to wonder to what extent we are talking about a broken clock or blind squirrel or that economist who "predicted ten of the last three recessions". I could be wrong -- as I said, I'm not familiar with the body of his work, let alone in possession of some comprehensive prediction scorecard on him, but since it seems almost that a day doesn't go by without Dean saying "Hey, I called the housing bubble! I called the housing bubble!", I have to wonder.

Dean -- let me reiterate.

BIS chief economist William White nailed this -- using Hayek's causal accound of the misdirection of production -- and was speaking out about the misdirection of capital as early as 2003, speaking with Greenspan personally on the matter.

Systematically the economists and financial analysists who explained what was happening in advance were Hayekian macroeconomists -- there was many of them. About half of all economists and financial analysists who are talking about a serious unstustainable problem in the 2000s were using Hayekian macro. Peter Schiff and William White were perhaps the most famous of them, but they were not alone.

Meanwhile, "mainstreamers" like Krugman were repeatedly _calling_ for a Fed induced housing and consumption bubble as a "cure" for the economy.

And folks like Krugman, De Long, and De Grauwe -- deeply incompetent in the field of Hayekian macroeconomics -- continue to attempt to disparage and marginalize the causal account that allowed folks to explain what was happening before it happened.

And most all of this is driven by anti-scientific prejudice, leftist ideology and the fake science ideology of the scientistic macroeconomists.

Who was yelling loudest at the incompetence of Bush, Greenspan, Bernanke, Paulson and the rest thoughout all this -- the HAYEKIAN macroeconomists.

And they were pointing out all the time the anti-Hayekian model these guys were using, and the multiply pathological regulatory and government bailout structure lying behind almost the whole of it.

The incompetence here wasn't a "free market" things -- it was an economic incompetence thing and a pathological statist things.

There were all sorts of regulations in play -- and they added up to an entirely pathological system.

I agree with Greg that the bubble was not entirely "a free market thing." There were many factors artificially inflating demand.

Nonetheless, Dean Baker deserves enormous credit for not only recognizing the bubble early, but also for making strenuous efforts, over the years, to bring it to the attention of others. The big question is, why did his compelling analysis NOT convince enough of the public-spirited people amoung the relevant policy-makers and interest groups? What was wrong with the way they processed information?

America got "stuffed" by the Greenspan Scam. OF COURSE, Dr. Baker and others saw it coming as it was wide open and blatant. Its just that calling the BANK ROBBERS to help stop the bank robbery never works.

Greg, give it a rest. As someone who once asked in a graduate level econ class if we were going to talk about Austrian economics, and when the answer was "no" shut off my brain for the rest of the semester, I do understand -- but our society is simply not going to operate Hayek's way.

It is not "leftists" that are the problem, either. It is the simple greed of those who gain advantage from this system. Inequality is the problem, and every time the economy veers into substantial income inequality, we're going to see collapses happen since those without money can't buy stuff, and when most people don't have money, nobody buys stuff. Pretty simple. So, if we couldn't afford to live from borrowing off our houses anymore, the game was up. Anyone with a brain could see when this bubble popped it would spell trouble -- you don't have to be a Hayek economist to figure that out, really. Just look at the debt levels rising for over twenty years, the level of savings dropping, credit increasing, and you'll see it.

Really if you want to blame someone, go ahead, but you're wrong. It is the entire American game that is over -- played by everyone. Now, we have to do the hard work of fixing the problems and not just trying to repair the game. It won't work.

It's not as cut and dried as Mr. Baker makes it out. I seem to remember Bush proposing to rein in Fannie and Freddie's leverage and risk, and congressional Democrats, particularly in the Senate, using their power to kill reform, on the basis that Franklin Raines and co. were doing a wonderful job and not posing any risk at all to the financial system or the economy.

As for stopping the bubble, once it gets started, it can't be stopped prior to its collapsing under its own weight. Imagine if Bush had reined in leverage. All people who had bought in the 2-3 years prior to such a reining in would be underwater. Democrats would have successfully argued that Bush killed the American Dream of home-ownership.

The only way to stop a bubble is not to let one get started in the first place. And to do that, we need to start by auditing the Fed, and then abolish it. For I can think of no other institution in American government that has failed so miserably at its mission than the Federal Reserve.

I've said this before, but I don't know if anyone in the history of anything has ever so milked getting one call right.

You don't know.

I'm not familiar with the body of Dean's work, but I have to wonder to what extent we are talking about a broken clock or blind squirrel or that economist who "predicted ten of the last three recessions".

Let me clear up your ignorance. Those who didn't worship at the hyper-partisan altar of free-market fundamentalism were able to easily predict the disaster, while the wall street fundamentalists were breaking out the champagne bottles. Examples of those who don't worship at the altar include Taleb, Baker, and Soros, all of whom were either ignored or disparaged by the hyperpartisan fundamentalists. Whether they falsely predicted previous disasters is a red herring.

I could be wrong -- as I said, I'm not familiar with the body of his work, let alone in possession of some comprehensive prediction scorecard on him, but since it seems almost that a day doesn't go by without Dean saying "Hey, I called the housing bubble! I called the housing bubble!", I have to wonder.

The private vices of the 80's have finally come home to roost, and Dr. Baker outlined those vices in his book The U.S. Since 1980, the only book of his I've fully read. I've skimmed The Conservative Nanny State and will probably buy the last two books I mentioned and Plunder and Blunder and Social Security: The Phony Crisis. As I wrote earlier, "some comprehensive prediction scorecard" would be immaterial to correctly predicting the housing bubble and its crisis.

Leonhardt is just part of the "omigod, the banks are okay, so we dodged a bullet" argument that since the banks are okay, we're all okay. But the banks stepped aside and the bullets are heading for the rest of us. In California, foreclosures are rising, and with declining house prices (65% of Sacramento homeowners with mortgages are underwater), those who lose jobs or work hours may lose their houses too.

PMA,

Hey, if I try again to engage you in rational and mutually-responsive discussion, will you again respond evasively, dodging my questions (which went to the core of your arguments, to use that term loosely) and running away again as you've done in both our past exchanges? (see http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=07&year=2009&base_name=congressional_ignorance_of_hea and
http://keithhennessey.com/2009/08/03/lynchpin/ )

Now, let me walk you through a bit of common sense reasoning:

1. Someone constantly mentions that he predicted something correctly, implying that people should attach greater credibility to his predictions generally and even more broadly to his analyses and conclusions of all sorts, related or unrelated to the subject of that prediction.

2. A person of even moderate wisdom and/or intelligence would not assume that this prognosticator/analyst is generally a very good prognosticator/analyst merely on the basis of getting one prediction right (granting arguendo the premise that he had indeed gotten that one "right"), but rather would only attach that rating and credibility after taking a more thorough or comprehensive look at his full set of predictions and their accuracy.

3. By contrast, you (apparently in your most recent attempt to "get even" with me for presenting legitimate challenges to your previous, self-righteous, obliviously ignorant comments and calling you on avoiding my related questions/arguments) say Whether they falsely predicted previous disasters is a red herring...As I wrote earlier, "some comprehensive prediction scorecard" would be immaterial to correctly predicting the housing bubble and its crisis. Which either means you don't get the (very, very simple) concept explained in #2 above and/or or you totally miss my point (which was #2 above)

I suppose if some psychic or stock analyst shows you that he correctly predicted something, you'll spend all your money on his services without stopping to ask if (or to what extent) his predictions were consistently correct. Good luck with that.

By the way, feel free to engage in good faith and answer the questions I posed to you on those other threads.

1. For Robert Lucas, Eugene Fama, and John Taylor, there still was no bubble apparently, as Judge Posner, now an apparent apostate to the Faith, remarks. http://correspondents.theatlantic.com/richard_posner/2009/08/economists_on_the_defensive--robert_lucas.php When the dominate school of the economics profession is telling policy makers to ignore 3rd grade arithmetic and and not noticing if there might be a limit to the amount of debt individuals could carry when median incomes were not only stagnant, but declining, one can some sympathy for the policy makers.

2. For Brooks, Greg Ransom, and their fello travelers. First, I must admit that I could not really discern what you are criticising Dean for in this Post as on your own terms you think Bernanke, Paulsen, Geithner, and Obama have been a disaster. He is criticising Leonhardt's article for celebrating this group for keeping the ship afloat after running it into an iceberb.

3. So your criticism is that Dean does not share your Hayekian Faith and must be pummeled until he joins the Church. Although now disowned now by the members of the Hayekian Faith, the Nobel Laureates Lucas, Fama, and Taylor, et. al. have always stood for no Government intervention in the economy, no intervention to correct income inequality, and, although they may disagree with some of Hayek's specific economic prescriptions (such as abloishment of the central bank), they, along with the Pater Familias of the movement, Milton Friedman, adopt Hayek's basic dogma in the "Road to Serfdom" that that all "Statist" interventions tend toward socialism and slavery while all "Capitalism" tends to toward "Freedom and Civilization." For the last 30 years, admittedly in fits and starts, the policies being implemented by the Government up until to September 2008 have been "to limit the State" and expand the scope of unregulated "Capitalism." One could say it has not worked out to well. Like the devotees of Communism who excuse all of its disasters and crimes by stating "that it has not really been tried." Hayekian Capitalism exists in an abstract utopia because it "has not really been tried." Well, given the historic facts and inequality that exists such perfection in trying could never really exist.

Rick,

Re:
For Brooks, Greg Ransom, and their fello travelers. First, I must admit that I could not really discern what you are criticising Dean for in this Post...
So your criticism is that Dean does not share your Hayekian Faith and must be pummeled until he joins the Church.

Thanks for adding yet another example of how presumptuous people tend to be in the political blogosphere, and possibly also how obliviously people project their own hyperpartisanship or ideological rigidity onto others (I say "possibly" because I can't conclude from that one comment alone that you have such traits, although your presumptuousness and attack based on are typical signs).

First, just to clear up your inexplicable confusion over something fairly simple and straight-forward, my point regarding Dean pertained only to his incessant references to his having (per his account, and I assume in reality) correctly called the housing bubble and his related incessant implications that we should therefore attach to him exceptional credibility regarding all sorts of analytical matters involving trade-offs associated with alternative economic policies. I was simply making the point that just because someone gets one prediction right, it doesn't mean he's good at prediction generally, let alone that his audience should generalize his skills even more broadly. Rather, one should at least start by considering his overall track record of accuracy of predictions and on other matters.

As for your presumptuous garbage about my supposed "fellow travelers" and my supposed ideology or economic school of thought to which I supposedly subscribe, you have apparently presumed all of that simply on the basis that I raised the above point and related question, apparently either failing to understand my simple point or refusing to take it at face value as limited in scope to the matter I addressed; instead you just presumed it to be some mere pretext for "pummeling" Dean "until he joins the Church" to which I supposedly belong in your presumptuous world.

yeah Dean, it's good for employers because now they have total control over you. no pay raises, can cut benefits, and all us common folks can do is work longer hours and suffer.