Jack Balkin Is Wrong
DeLong Smackdown Watch: Beauty, Accessibility, Crowding, Expense

Washington Post Death Spiral Watch (Alec Klein and Zachary A. Goldfarb Edition)

Why oh why can't we have a better press corps? Dean Baker thinks that Alec Klein and Zachary Goldfarb of the Washington Post do a predictably lousy job in their A1 story about the housing bubble.

Me? I barfed at the opening of the story:

The black-tie party at Washington's swank Mayflower Hotel seemed a fitting celebration of the biggest American housing boom since the 1950s: filet mignon and lobster, a champagne room and hundreds of mortgage brokers, real estate agents and their customers gyrating to a Latin band. On that winter night in 2005, the company hosting the gala honored itself with an ice sculpture of its logo. Pinnacle Financial had grown from a single office to a national behemoth generating $6.5 billion in mortgages that year. The $100,000-plus party celebrated the booming division that made loans largely to Hispanic immigrants with little savings. The company even booked rooms for those who imbibed too much. Kevin Connelly, a loan officer who attended the affair, now marvels at those gilded times. At his Pinnacle office in Virginia, colleagues were filling the parking lot with BMWs and at least one Lotus sports car. In its hiring frenzy, the mortgage company turned a busboy into a loan officer whose income zoomed to six figures in a matter of months. "It was the peak. It was the embodiment of business success," Connelly said. "We underestimated the bubble, even though deep down, we knew it couldn't last forever"...

A $100K party for "hundreds" of mortgage brokers--say, 500. That's $200 per broker. That's a very nice fringe benefit--but Belshazzar's court at Babylon it is not. Klein and Goldfarb think that the right way to begin their story is to evoke the themes of the righteous vengeance of YHWH against decadent luxury that are part of our culture from the way-back stories of the dogs licking the pooled blood of Jezebel and of Daniel reading the writing on the wall--why, "the company even booked [hotel] rooms for those who imbibed too much"! My reaction on finishing the lead was that Klein and Goldfarb really don't get out much.

But let's turn the mike over to Dean Baker, who has some more intelligent things to say:

Beat the Press: The Post Misses the Housing Bubble Yet Again: The Washington Post contributed to the housing bubble in the late 90s and first half of this decade by consistently presenting the views of housing market cheerleaders and rarely presenting the opinions of analysts who recognized the problems in the housing market... the most widely cited expert on the housing market in the Post in the years from 2003 to 2006 was David Lereah... chief economist of the National Association of Realtors... author of Are You Missing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them....

The first article today relies exclusively on the views of analysts who failed to recognize the bubble... fundamentally distorts the phenomenon.... [A]ttributes the bubble to the proliferation of subprime and exotic loan instruments. in fact, the bubble preceded the surge in subprime and the development of exotic financial instruments... [but] house prices had begun to diverge from their long-term trend in the mid-90s.... By 2002, real house prices had already increased by more than 30 percent.... If the Post (and the rest of the media) had allowed the views of economists who recognized the bubble into its pages, it might have mitigated the damage....

The growth of subprime and the spread of exotic financing is characteristic of the later stages of financial bubbles.... [T]he Post has confused cause and effect in making this the centerpiece of its analysis. In presenting the bad financing as central, the Post... conceals its own culpability....

Prior to the collapse of the bubble, it would have been very difficult to know exactly which banks were involved in which bad practices unless inside sources were willing to come forward. However, the fact that bad lending practices were taking place on a very large scale was easily knowable....

The Post bizarrely describes a scenario in which Greenspan "puzzled over one piece of data a Fed employee showed him in his final weeks. A trade publication reported that the subprime mortgages had ballooned to 20 percent of all loans, triple the level of a few years earlier." If this is true, then it implies an incredible level of incompetence on Greenspan's part. The rise in subprime lending was not some obscure fact known only to a privileged few. It was a widely noted development in the housing market over the years 2003-2005. If Greenspan was just made aware of this growth as in the last month of his tenure in January of 2006, then he was incredibly negligent in performing his job. The growth in housing prices had been the central fuel of the U.S. economy in the recovery following the 2001 recession. Greenspan had been an eager proponent of housing, dismissing the concerns of those who warned of a housing bubble. If he did not even know of the surge in subprime lending, then it is difficult to imagine any possible basis on which he could have ruled out the existence of a bubble in the housing market. (The article says that Greenspan "did not recall" whether he mentioned the growth in subprime lending to Bernanke. If Bernanke, did already know about the growth in subprime, then he is not competent to be chairman of the Fed.)

In short, this article does more to conceal than reveal the developments that led to the current housing crash. There were no deep mysteries.... [T]he Post and the rest of the media relied almost exclusively on analysts who somehow failed to recognize the housing (and stock) bubbles or worse, had a direct interest in perpetuating these bubbles...

Dean Baker is much more right than wrong, but I don't think that he is completely write about everything.

Back in 2005, apropos of housing prices, I wrote somewhere that there were seven elements:

  • A pure real estate bubble element.
  • A temporary fall in long-term interest rates due to an unsustainable capital inflow element.
  • A permanent fall in long-term real interest rates element.
  • A congestion-because-of-the-filling-up-of-America (or at least of much of its coasts) element.
  • A richer country able to pay more for location element
  • In California, an unpleasant legacy of Howard Jarvis element--California levies a uniquely large "tax on moving" that makes lots of empty-nesters very slow to downsize.
  • A NIMBY element--he transformation of America's local governments from cabals to enrich real estate developers to cabals to preserve and augment the values of voters' single-family homes.

The question was how big were the first two elements, the worrisome ones from the standpoint of future financial crisis, compared to the other five. Back in 2005 I would have said that the first two were one-quarter of the nationwide housing price runup since the mid-1990s, and Dean Baker would have said that they were three-quarters at least.

During the past two and a half years reality has forced me to come up from one quarter to one half, but no further. Dean would say that I am still in denial and that an intervention is called for--and he may be right.