I used to watch those latenight tv infomercials that proposed to make millionaires in real-estate with no money down. Buy and sell houses and get rich overnight. I felt there was a hook somewhere and NOW here it is. My question would be is how YOU, Dean Baker, arrived at the 6-8 trillion loss and may it be much deeper than that.

I'd also like to know where the 6 (housing) and 8 (stock) figures came from, and if the loss of stock wealth is the market correcting a bubble unrelated to the housing bubble or connected to it? That is, were stock over-valued because of the housing bubble? Thanks.

The Case-Shiller 20-city index shows approximately a 20 percent nominal decline since June of 2006. If you put that in real terms, it is now around 30 percent. The value of residential housing at that time was a bit over $20 trillion. 30 percent of $2o trillion gets you $6 trillion.

The stock market was valued at just over $20 trillion at its peak last fall. It is down by around 40 percent, that gives you $8 trillion.

That's the story.

I don't disagree with your assertion that the collapsing housing bubble has precipitated the collapse of the ponzi banking structure leading to the credit crunch (not to put words in your mouth).

I think the cause is much more fundamental, extending to the collapse of multiple asset bubbles caused by assinine monetary stimulus, fraud, bad regulation, bad tax policy, bad corporate management, crime-family, predatory financial institutions, radical republican congress and presidency, mercantilist trade partner nations, concentrated, biased, and incurious corporate press, and incredibly bad economic analysis, policy, and theory from academia.

The last 8 years has been like watching Hannibal Lector, played by the RNC, feed the hapless FBI agent, played by the American people, sauteed portions of their own brains.

Dean Baker: THANK YOU for the clarification. I'm assuming that the Case-Shiller 20 city index would cover the 20 largest cities. I live in very rural Wyoming YET have seen an amazing amount of construction going on the last 10 years and an amazing amount of for sale signs in the last year, so I wonder if those large city averages would be an accurate application across the board.

«the growth of an $8 trillion housing bubble, by far the most important economic phenomenon on the decade.»

That's both sort of true and completely misleading: the housing bubble has been itself the result of a colossal credit bubble started in 1995-6 by the effective abolition of reserve requirements in the USA and the 0% yen carry trade from Japan.

This immense availability of extra credit has fed various asset bubbles since 1995-1996, of which the latest and biggest and worst is the one in real estate, but it is just a consequence.

«Now that it has burst and sent consumption plummeting, they are blaming the economic collapse on a "credit crunch" instead of the more obvious problem that consumers just lost $6 trillion of housing wealth and another $8 trillion of stock wealth.»

I'd say rather the opposite: the cause of the current economic situation is not the loss of 6+8 trillions of paper capital gains, but their creation in the first place, their creation made possible by enormous amounts of nearly free credit.

The creation of these paper capital gains was bad enough, but their realization by way of HELOCs and flipping even worse; but all of these enabled by the colossal credit explosion of 1995-6 and subsequent years.

What this article really shows is the problems with employer-based health insurance. When an employer files for bankruptcy, employees are suddenly expelled from their health insurance programs--no COBRA, nothing. Interestingly, the health care system then goes after the employees for payment, rather than becoming just another creditor of the bankrupt company.

And many small businesses only existed because of the credit bubble (credit cards, home equity), and therefore won't survive the collapse of same. The US has ten times more retail than Europe, three times more than Britain. We just don't need that many shoe lace emporia.

Dr. Baker,

You're unquestionably right that the housing (land) crunch is the culprit for our current economic crisis. But when are exponents of policies which counter such tendencies, such as Fred Harrison going to get their due in the media? Presumably, it'd help if mainstream economists would acknowledge the benefits of his way of thinking about the economy.

really good post, thank you for sharing this information.

Glad there is someone to clarify this; of course--as you point out--it should be the mainstream media doing the job, but whatever works.

-Jeremy
http://www.jeremyabrams.com

I think people don't like to call it a housing bubble, because they want to see their house value go back up. It is easier to swallow the news if we call it a "credit crunch." I think it is just two sides to the same coin though. If the housing bubble hadn't burst, then there would be no current credit crunch.

There are other issues to consider too. Even in a good economy the cookies and crackers industry was already seeing changes (according to the "Cookies and Crackers." Encyclopedia of American Industries. Online Edition. Gale, 2009) as consumers demand healthier snacks without trans-fats and huge amounts of sugars. Plus there are issues arising about marketing these sweet treats to children. Achway and Mothers was also a very small player in a very small industry. They rank about 30th in the industry with $250 million in sales.

Also, to me there seems to be a far more fundamental issue behind this. Our economy depends on petroleum. Petroleum derivative speculators grossly inflated oil prices while the housing bubble was bursting. With higher oil prices, there is higher prices to grow the ingredients for cookies, to ship the ingredients, to transport the workers to work, to manufacture the cookies and crackers, to make the packaging, to ship the packages to distributors and then retailers. Finally, the consumer had to spend more to get to the store to buy the cookies. Higher cost of goods sold might have had a lot to do with Archway having to rely on debt in the first place.

With growing food, energy and environmental catastrophes unfolding, the credit crunch/burst housing bubble might be the least that this industry as a whole will have to worry about as consumers loss their ability to buy cookies and crackers.

An interest of 1% on 200 000 $ cost 2 000 $, while it cost 10 000 $ at 5%, thus an amount of 8 000 $ more to pay.

If the revenue of the borrower don't raise by this same amount, what can possibly happen? A possibility of defaulting in payments, followed by a possible foreclosure.

When that happens by the hundreds of thousand, and almost in the same time, we have what we have now.

Inflation in the prices,
inflation in the mortgages,
inflation in the interest rates,
but
no inflation in the revenues !

good article,i like

good info, Thanks.

thanks for your sharing this information