Beat the Press blogger Dean Baker (10/23/08) finds an instance of economic reporting so egregious it “calls for an extra long arghhhhhhhhhhhhhhhhh!!!!!!!!!!!!!!!!” The offending occurrence: “NPR just reported on Morning Edition that the markets are plummeting because investors are realizing the seriousness of the damage caused by the credit crunch.” Baker sets ’em straight:
The economy is not in a recession because of the credit crunch. The economy is going into a recession because of the crash of the housing bubble. Homeowners are losing on the order of $8 trillion in housing bubble wealth, $110,000 per homeowner. For most families, this is most of their wealth.
It was this housing-bubble wealth that drove consumption and pushed the savings rate to near zero over the last four years. Now this wealth is disappearing and people are cutting back their consumption. In many cases, they no longer have the ability to consume, since many households were borrowing directly against their home equity to finance their consumption. In other cases, they now realize the need to save, since they are approaching retirement and have nothing to rely upon other than their Social Security.
Reminding us that “NPR completely missed the housing bubble on the way up” since “they relied almost exclusively on economists that did not know what they were talking about,” Baker pleads: “Can’t they find an economist who at least now can recognize the impact of the collapse of the housing bubble? The horror, the horror.”
Listen to FAIR’s weekly radio program CounterSpin: Dean Baker on the Financial Crisis (3/28/08)
Dean Baker may be a monument to economic expertise but he appears be overacting here a bit because I question the alarmist $110,000 loss in average home equity. That’s not so say some areas are seeing dramatic drops in prices but, IMHO, it isn’t he norm.
Recently I read a Washington Post article on the housing bubble that included a US map to the county level showing home foreclosure rates. Sure, there are states getting nuked by it like California, Nevada, Arizona, and Florida. Most of the nation, however, was largely unaffected.
For example, I have a house up for sale garnering a lot of interest that’s listed slightly above full assessed value. My city and its surrounding suburbia has a low foreclosure rate.
Dean Baker also appears guilty of overacting regarding NPR’s alleged economic gaff. Has he missed the stock market crash largely precipitated by fears over the credit crunch? Personally, the stock market crash has a much larger economic impact on me. It’s what’s mostly talked about around the ‘water cooler’ at work. Average Joes like myself are seeing 40-60% of their retirement savings wiped out in short order.
However, more to the point it’s hard to discuss housing prices or the credit crunch without getting into the general topic of the sub-prime mortgage mess. Foreclosure rates are at the root of both problems. Areas with a lot of foreclosures glutting the market obviously are the ones where non-default homeowners are seeing their equity evaporate since they have to compete with the foreclosure ‘fire sale’ discount pricing. Obviously, the same high foreclosure rate is what soured investors on mortgage backed securities creating the Wall Street panic and credit crunch where banks don’t trust other banks.
A final item not mentioned by either NPR or Mr. Baker is inflation. Sure gas prices have begun to plummet – an indication of how rotten things are – but food prices remain high and, according to experts, will stay there. Forgetting commodity inflation, medical inflation is a huge problem.
The middle class obviously is getting squeezed very hard at both ends. There’s a negative wealth effect because of stocks and housing plus inflation is bloating the cost of necessities faster than incomes rise.
Perhaps Mr. Baker and NPR will both see fit to tell the entire story.