Dean Baker, of the Center For Economic And Policy Research, correctly identified the US housing bubble in August 2002, four years before it peaked.
In a current article he points out ‘What Greenspan should have done‘ [aljazeera.com 11 Jan 2012].
“In Washington policy circles, money and influence can be used to make even the most simple and obvious things complicated and confused. This is certainly the case with the housing bubble and its aftermath. Four years into the housing bubble downturn, much of the country remains hopelessly confused about what happened, why it happened and who is to blame.
First, what happened is very straightforward: we had a huge run-up in house prices that had no basis in the fundamentals of the housing market. After 100 years in which nationwide house prices just kept even with the overall rate of inflation, house prices began to sharply outpace inflation, beginning in the late 1990s.
By 2002, when some of us first noticed the bubble, house prices had already risen by more than 30 per cent in excess of inflation. By the peak of the bubble in 2006, the increase in house prices was more than 70 per cent above the rate of inflation.”
“..some quick points on what could have been done. First, the Fed has responsibility for maintaining the stability of the US economy. Alan Greenspan should have recognised the bubble and done everything in his power to burst it before it grew to such dangerous levels.
Step one in this process should have been to document its existence and show the harm that its collapse would bring. This means using the Fed’s huge staff of economists to gather the overwhelming evidence of a bubble and to shoot down anyone who tried to argue otherwise. Greenspan should have used his Congressional testimony and other public appearances to call attention to the bubble.
This would have put the bubble clearly on everyone’s radar screen. And, the reality was that there were no serious counter-arguments. It is difficult to believe that this action by itself would not have slowed the home buying frenzy and curbed the issuance of junk loans, or at least their repurchase for securitisation.
Second, the Fed has enormous regulatory power beginning with setting guidelines for issuing mortgages. They first issued draft guidelines in December of 2007. It was not hard to find abusive and outright fraudulent practices in the mortgage industry, if anyone in a position of authority was looking for it.
Finally, the Fed could have used interest rate increases as a mechanism to rein in the bubble. This should have been a last resort, since higher rates would have slowed the economy at a time when it was still recovering from the collapse of the stock market bubble.
To maximise the impact of any rate increases, Greenspan could have announced that he was targeting the housing market. He could have said that he would continue to raise rates until house prices were brought back to a more normal level.”
In the case of Canada’s RE bubble, it’s too late for Mr Carney to do the right thing. The implosion quite likely has already begun of its own accord.
Of interest, here is what Dean Baker has said of the Canadian RE market: “It looks to me like you have some real problems. Canada could see house prices collapse by 25 to 30 per cent if interest rates rise by about two percentage points.” [Nov 2010]
On a related note, for those who can stomach it, take a look at this G&M article [12 Jan 2012] ‘Bernanke saw ‘relatively soft landing’ in housing in 2006′, featuring excerpts from Federal Reserve meeting transcripts from 2006. These guys seem almost completely unaware of the dangers that had been foreseen and written about by many others, so, I suppose, you could argue you couldn’t really expect them to move to clampdown on something that they didn’t think existed. – vreaa