I like Dean Baker quite well, and often link to his columns.
And he was one of the few 'mainstream' economists to actually see the housing
bubble developing, and call it out. Some may claim to have done so, and can
even cite a sentence or two where they may have mentioned it, like Paul
Krugman for example. But very few spoke about doing something about it while
it was in progress. The Fed was aware according to their own minutes,
and ignored it.
The difficulty we have in the economics profession, I fear, is a great deal
of herd instinct and concern about what others may say. And when the Fed runs
their policy pennants up the flagpole, only someone truly secure in their
thinking, or forsworn to some strong ideological interpretation of reality or
bias if we are truly honest, dare not salute it.
Am I such a person? Do I actually see a fragile financial system that is
still corrupt and highly levered, grossly mispricing risks? Or am I just
seeing things the way in which I wish to see them?
That difficulty arises because economics is no science. It involves judgement
and principles, and weighs the facts far too heavily based upon 'reputation'
and 'status.' And of course I have none of those and wish none.
But it makes the point which I have made over and again, that all of the
economic models are faulty and merely a caricature of reality. And
therefore policy ought not to be dictated by models, but by policy objectives
and a strong bias to results, rather than the dictates of process or methods.
In this FDR had it exactly right. If we find something does not
stimulate the broader economy or effect the desired policy objective, like
tax cuts for the rich, using that approach over and over again is certainly
not going to be effective.
Economics are a form of social and political science. And with the
political and social process corrupted by big money, what can we expect from
would be 'philosopher kings.'
The housing bubble was no 'cause' of the latest financial crisis. More
properly it was the tinder and the trigger event. The S&L crisis was just
as great, if not greater. Why then did it not bring the global financial
system to its knees?
The interconnectedness of the global system with its massive and
underregulated TBTF Banks, the widespread and often fraudulent mispricing of
risk, all make cause for a financial system to be 'fragile.' In this thinking
Nassim Taleb is far ahead of the common economic thought as a real 'systems
thinker.' The Fed is not a systemic thinking organization because they
are owned by the financial status quo, and real systemic reform rarely comes
from within.
I see the same fragility which existed from 1999 to 2008 still in the system,
only grown larger, global, and more profoundly influencing the political
processes.
The only question is what 'trigger event' might set it spinning, and how
great of a magnitude will it have to be in order to do so. The more fragile
the system, the less that is required to knock it off its underpinnings.
And a crisis is not a binary event. There is the 'trigger' and the dawning
perception of risks, and the initial responses of the political, social, and
regulatory powers.
There is no point in debating this, because the regulators and powerful
groups like the Fed are caught in a credibility trap, which prevents them
from seeing things as they are, and saying so.
So Mr. Baker, rather than looking for the bubble, let's say we have a fragile
system still disordered and mispricing risk, with a few very large banks
engaging in reckless speculation, mispricing risk for short term profits,
manipulating markets, and distorting the processes designed to maintain a
balance in the economy.
Rather than hold out for a 'new bubble' as your criterion, perhaps we may
also consider that the patient is still on full life support after the last
bubble and crisis. Why do we need to find a new source of malady when
the old one is still having its way?
I think if one exercises clear and open judgement, they can see that we have
stirred up the same pot of witches brew that has made the system fragile and
vulnerable to an exogenous shock, and has kept it so.
A new crisis does not have to happen. This is the vain comfort in these sorts
of 'black swan' events, being hard to predict. But they can be more
likely given the right conditions, and I fear little will be done about this
one until even those who are quite personally comfortable with things as they
are begin to feel the pain,
The problem is not a 'bubble.' The problem is pervasive corruption,
fraud, and lack of meaningful reform. The 'candidate' is the financial
system itself, with its outsized hedge funds and the TBTF Banks with their
serial crime sprees and accommodative regulators in particular.
And if one cannot see that in this rotten system with its brazenly narrow
rewarding of a select few with the bulk of new income, then there is little
more that can be said.
Neil Irwin, a writer for the NYT Upshot section, had an
interesting debate with himself about the likely future course of the
economy. He got the picture mostly right in my view, with a few important
qualifications.
"First, his negative scenario is another recession and possibly a
financial crisis. I know a lot of folks are saying this stuff, but it's
frankly a little silly. The basis of the last financial crisis was a massive
amount of debt issued against a hugely over-valued asset (housing). A
financial crisis that actually rocks the economy needs this sort of basis.
If a lot of people are speculating in the stock of Uber or other wonder
companies, and reality wipes them out, this is just a story of some
speculators being wiped out. It is not going to shake the economy as a whole.
(San Francisco's economy could take a serious hit.)
Anyhow, financial crises don't just happen, there has to be a real basis for
them. To me the housing bubble was pretty obvious given the unprecedented and
unexplained run-up in prices in the largest market in the world. Perhaps
there is another bubble out there like this, but neither Irwin nor anyone
else has even identified a serious candidate. Until someone can at least
give us their candidate bubble, we need not take the financial crisis story
seriously.
If we take this collapse story off the table, then we need to reframe the
negative scenario. It is not a sudden plunge in output, but rather a period
of slow growth and weak job creation. This seems like a much more plausible
story...
Anyhow, a story of slow job growth and ongoing wage stagnation would look
like a pretty bad story to most of the country. It may not be as dramatic as
a financial crisis that brings the world banking system to its knees, but it
is far more likely and therefore something that we should be very worried
about."
Dean Baker, Debating
the Economy with Neil Irwin, 31 October 2015
