www.cepr.net<\/a>. <\/p>\nRough Transcript<\/strong><\/p>\nSonali Kolhatkar: <\/strong> My guest this morning is Dean Baker. He is Co-Director at the Center for Economic and Policy Research and he is also author of the report. Welcome to Uprising, Dean.
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\nDean Baker: <\/strong> Thanks for having me on.<\/p>\nSonali: <\/strong> Thanks very much for joining us today. First, what do you mean when you say that market fundamentals were ignored in policy circles in the media?<\/p>\nDean:<\/strong> Well, this has happened both with the Stock Market in the 90\u2019s and then the housing market at present. You know, the fundamentals aren\u2019t that hard to determine in the stock market. Basically, it\u2019s corporate profits \u2013 the ratios of stock prices to corporate profits and those had gone through the roof in the late 90\u2019s so it should have been apparent to people that there was a bubble. I know, retrospectively, everyone says they knew that but the fact was at the time, if they did, they weren\u2019t saying that or acting that way. So, you know, that was the fundamental of the stock market. In the more recent period, the fundamental housing market was simply, you know – how are house prices moving relative to other prices? And, I\u2019ve looked at government data going back to the early 50\u2019s and you find that house prices have just increased at pretty much the same rate as other prices. The house prices basically move at the same rate as the overall rate of inflation, which is the national average. Now, Robert Schiller\u2019s an economist at Yale University, constructed his own series where he went back to the 1890\u2019s and he finds for 100 years, 1890\u2019s, mid-90\u2019s, into 19th century, mid-19th and 20th century, house prices just keep pace with inflation. Suddenly, in the late 90\u2019s and on thru the current decade, house prices start to rise and, in fact, increase by 70%, after you adjust for inflation. There\u2019s no precedence whatsoever and no one had any explanation for it either. I debated, I think, just about everyone on this topic and no one had anything to pass the laugh test and, you know, that\u2019s the basic fundamentals. You see this increase in prices that is, really, lacks any explanation, so, you know, I began to say we had a housing bubble and, you know, bubbles, by their nature, they can\u2019t persist so, you know, at some point, they collapse and it looks like we\u2019re starting to see that now.<\/p>\nSonali:<\/strong> So, you\u2019re basically saying that some of these very fundamental statistics that really should have been obvious to economists in the media were ignored. If so, what were they paying attention to to convince them that there wasn\u2019t a crisis looming?<\/p>\nDean:<\/strong> Well, they like happy talk. And this happened, you know, you go back to the 90\u2019s where they had all these people who kept saying no matter how high the NASDAQ went that it would just keep going higher, you know, the DOW – 36,000. I mean, basically, total nonsense. I mean, if you just picked someone who is an alcoholic and babbling, they would have had more sensible things to say but these people were on the Lehrer News Hour, they were on NPR, they were in the NYTimes and the Washington Post and the same thing happened with the housing market. So, you know, we did a quick Nexus search – the most widely cited figure on the housing market in the media was David Lereah, who was the Chief Economist from the National Assoc. of Realtors, and the author of the book, Why the Housing Boom Will Not Bust and How You Can Profit From It. You know, so this is who they had on – people who were basically pushing people to buy homes, who had a direct material stake in getting people to buy homes and those who might have been more objective, who had stood back and might have made the points I made – there were other economists, not a lot \u2013 but, other economists saying the same thing, we were rarely heard from.<\/p>\nSonali:<\/strong> Now, Dean, let\u2019s talk more about the housing issue. As anybody who has tried to buy a home in recent years realizes, housing prices have gone up ridiculously and apparently, since 1995, they\u2019ve risen by more than 70% and that\u2019s after you adjust for inflation. So, this is basically, a clear indication as you have said, of one of those fundamentals that should have been paid attention to regarding the housing bubble. What now, if there are so many unsold homes, so much, sort of, vacant, even rental units, what can happen and how would it affect the market if the rate of construction continued at its current rate?<\/p>\nDean: <\/strong> Well, there seems no way out of this except for house prices to continue to fall. House prices, in many areas of the country, are now falling. In places like D.C., they fell about 6% over the last year; San Diego, about the same amount; they\u2019re down a little bit less in Boston. So, in many areas of the country, they are now falling and I don\u2019t see any way out of this story except for them to continue to fall and, likely, a lot more because the inventory of unsold homes is more than 50% higher than it\u2019s ever been in the past, the number of vacant ownership units is about double its previous peak. So, it\u2019s very hard to see how you correct this vast inventory unless you get a large, large drop in prices. Now, you also continue to see cutbacks in the housing sector itself. So, housing construction\u2019s down about 20% from its peak but it\u2019s probably going to fall, you know, a fair bit further \u2013 I\u2019d say it would fall another 20% or so. So, we\u2019re going to see a very, very big hit to the housing sector itself. A big one we\u2019ve already seen. But, then on top of that, as house prices fall, this is, you know, a huge portion of people\u2019s wealth. I estimate the amount of housing bubble wealth \u2013 the difference between house, the value of housing wealth as it is today, and where it would be if house prices just followed their long term trend, at 8 trillion dollars, which comes to $110,000 for every home owner in the country. So, much if not all that, is likely to disappear in the next few years and that\u2019s going to be a very, very big hit to the economy and a very, very big hit to a lot of people\u2019s personal finances.<\/p>\nSonali: <\/strong> What effect are defaults on mortgages having on the housing bubble itself?<\/p>\nDean: <\/strong> Well, this is part of the story of why you see the meltdowns in the stock market because the debt. What happens these days is you get a mortgage in a bank, they typically sell that in the secondary market. They pass that off, it gets formed into pools, and those bonds are sold all over the world. Now, it turns out that you have people, you know, investors in France, in Germany, other countries, that were holding this debt. Now they\u2019re finding that it\u2019s actually not good debt, you know, so that\u2019s created the problems in the financial markets both in the United States and around the world. But, in terms of the housing market, the direct impact there is that as soon as those defaults start to rise, investors get a very, very different attitude towards lending in the housing market. So, what was going on a year, 2 years, 3 years ago, were investors just throwing money into this market because they assumed it was very, very safe and they didn\u2019t realize it wasn\u2019t. Now, they suddenly go the other way and they realize that, no, there\u2019s actually a big risk and they\u2019re likely to be very tight with making money available. So, in addition to having huge oversupply of housing, a lot of people that would have been able to buy a home a year ago are going to find they have a much more difficult time getting a mortgage now so the demand side is going to be crimped as well.<\/p>\nSonali:<\/strong> I\u2019m speaking with Dean Baker. He is the Co-Director of the Center for Economic and Policy Research and has authored a new report called, Midsummer Meltdown: Prospects for the Stock and Housing Markets. Let\u2019s talk about the cash infusions by the Federal Reserve Bank. What is your opinion of this means of trying to stabilize the markets and what sort of long-term effect can it have, if any?<\/p>\nDean:<\/strong> Well, there are two points here: one, as a long-term prospect, I don\u2019t see it having that much impact because the basic story is you have a lot of mortgage debt that is going to go bad and there\u2019s nothing the Fed can really do about that. People owe, you know, $300,000 on homes that today are worth $250,000. A lot of those mortgages are going to default because it doesn\u2019t, you know, it doesn\u2019t make a lot of sense, unless you really love the home to pay a $300,000 mortgage on a $250,000 home and, in some cases, the discrepancies are even greater so you probably have places, you know, like San Diego where you\u2019ve had a big fall in prices or Florida, where people might owe $400,000 or $500,000 on a home that may be only worth half that much. So, you\u2019re going to see a lot of defaults. There\u2019s not a lot the Fed can do about that. Now, as a short-term matter, if they can sort of, kind of, keep things afloat, one thing that I worry very much about is that you might have, you know, more sophisticated actors dumping this debt on less sophisticated actors. So, you have, you know, Ben Bernanke, the Chair of the Federal Reserve Board, saying everything\u2019s fine. I mean, he\u2019s not necessarily encouraging people to go out and buy mortgage-backed securities but, nonetheless, a lot of people might take it that way. So, what you might have is some of the high-flying hedge funds and the other big actors dumping those mortgage-backed securities that are now worth at least a lot less, if not actually worthless, worth a lot less than they were, say, a month or two ago, dump them on, you know, more na\u00efve investors, put them into mutual funds, maybe even some individuals will end up with them and then they\u2019ll go bad 6 months, a year or two years down the road. So, what the Fed, in fact, would be doing is giving these people some breathing room, giving them the opportunity to dump their bad assets on those who don\u2019t know better.<\/p>\n
\nSonali:<\/strong> Now, Dean, what is, how do Ben Bernanke\u2019s actions, how do his actions compare to those of the previous Chair of the Federal Reserve, Alan Greenspan, and how much culpability does Greenspan bear in what we\u2019re seeing today?<\/p>\nDean:<\/strong> Well, I think the big part of the story is letting the bubble get out of hand to begin with. They\u2019re the ones sitting there. You know, the Chairs of the Federal Reserve Board is the entity that\u2019s really sitting there that\u2019s supposed to preserve order in financial markets and they really blew it. I mean, this isn\u2019t a little thing, you know, they\u2019re absolutely obsessed with inflation. They read the numbers down to the, you know, second and third decimal that, you know, inflation might rise by, you know, one tenth of a percentage point. But, here it is, you know, with Greenspan – he let a ten trillion dollar stock bubble grow and just said, oh, I\u2019m not going to worry about that \u2013 we\u2019ll just deal with it when it bursts. And then, he and Bernanke allow an eight trillion dollar housing bubble to grow and, you know, again, the attitude is we\u2019ll deal with it when it bursts. And, you know, frankly, it\u2019s not that easy to deal with. And, you know, the only reason they were able to get out of the recession caused by the stock crash was by pushing the housing bubble. I always liken this to an alcoholic who, you know, deals with one hangover by starting on the next one. It\u2019s not a good way to run the economy.<\/p>\nSonali: <\/strong> Is there any hope, particularly, for lenders, that the government might start or government-sponsored enterprises might start buying mortgages to support the housing market?<\/p>\nDean:<\/strong> That could happen and I really hope it doesn\u2019t. Again, it\u2019s the same sort of thing because they dump off their debt on someone else. And, that very well could be the someone else that, if they could get Freddie Mac and Fannie Mae are the two government-sponsored enterprises that basically created the secondary market in home mortgages, if they can get them to step in the market and buy up, you know, hundreds of billions of dollars of debt, that will give, you know, the hedge funds and the other big actors an opportunity to dump a lot of it. So, you know, that may happen. There are people who want to see that happen. I think it will be a big political fight. Again, I would say I certainly hope it doesn\u2019t happen. You know, as a general rule, I think that Fannie Mae and Freddie Mac have played a very useful role in the economy and I wouldn\u2019t necessarily be opposed to expanding their role in the housing market but not now. That doesn\u2019t make sense to just tell the big dealers that they can just dump it off on the government.<\/p>\nSonali: <\/strong> So, Dean, are you saying that a severe recession is unavoidable?<\/p>\nDean: <\/strong>Well, I think we\u2019re going to have problems. Whether we could, you know, our ability to get out of a recession will depend on the effectiveness of government policy. I don\u2019t think we\u2019re doomed to a severe recession but I think if we have bad policy we certainly can get one. If you look at the case of Japan, after their housing and stock bubble burst at the end of the 80\u2019s, they basically had 13, 14 years of, if not actually a recession, very, very weak economic growth. So, if you do things wrong and I would say they did just about everything wrong in Japan, we could end up in that situation.<\/p>\nSonali:<\/strong> So, what can be done right? Particularly, not just at a government level, but particularly on an individual level, do you have any advice to dispense to those who are either current homeowners or who are looking to be homeowners?<\/p>\nDean:<\/strong> Well, you know, in terms of homeowners, I mean, the better advice would have been a while ago, I mean, if you\u2019re looking to buy a place now, I would strongly urge someone to wait. And, you know, in terms of market timing, you know, I\u2019m not a big advocate of, you know, running out and selling and buying. On the other hand, if you\u2019re thinking of something and moving out of a home, you know, you\u2019re probably better off to do it now than try it, you know, 6 months from now. I\u2019d say that much. But, you know, it would have been wise for people to have been cautious. If you weren\u2019t, you know, there\u2019s not much you can do at this point. In terms of the government, you know, when we hit bottom, you know, the key will be to, on the one hand, for the Federal Reserve Board to have a stimulatory policy, have low-interest rates, give the economy room to grow again. And, on the fiscal side, we should have a stimulatory policy which could mean tax cuts targeted towards, you know, more moderate, low-end people and also try and have spending to address some of the needs we have because that would be a good time to do it, you know, extend health-care, rebuild our infrastructure, try and tackle global-warming. There\u2019s lots of things on that list that we could spend money on and, you know, if we\u2019re in a bad slump, we shouldn\u2019t be shy about doing it.<\/p>\nSonali:<\/strong> Well, Dean Baker, I want to thank you very much for joining us today. And, where can listeners get a hold of your report?<\/p>\nDean:<\/strong> It\u2019s at our website: cepr.net<\/p>\nSonali: <\/strong> cepr.net And again, the title of the report is Midsummer Meltdown: Prospects for the Stock and Housing Markets. Dean, thanks so much for joining us.<\/p>\nDean: <\/strong> Sure, thanks a lot for having me on.<\/p>\nSonali:<\/strong> Dean Baker is Co-Director for the Center for Economic and Policy Research. Again, that\u2019s online at cepr.net and he authored the report that we\u2019ve just been discussing.<\/p>\nSpecial Thanks to Julie Svendsen for transcribing this interview<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"| the entire program GUEST: Dean Baker, Co-Director of Center of Economic and Policy Report, author of the report, “Midsummer Meltdown: Prospects for the Stock and Housing Markets” Last Friday, the Federal Reserve Bank issued a statement saying that it would seek to \u201cfacilitate the orderly functioning of financial markets.\u201d Wall Street followed the statement […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","footnotes":""},"categories":[2,11],"tags":[],"class_list":["post-1791","post","type-post","status-publish","format-standard","hentry","category-daily-program","category-transcripts"],"_links":{"self":[{"href":"https:\/\/uprisingradio.org\/home\/wp-json\/wp\/v2\/posts\/1791","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/uprisingradio.org\/home\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/uprisingradio.org\/home\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/uprisingradio.org\/home\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/uprisingradio.org\/home\/wp-json\/wp\/v2\/comments?post=1791"}],"version-history":[{"count":0,"href":"https:\/\/uprisingradio.org\/home\/wp-json\/wp\/v2\/posts\/1791\/revisions"}],"wp:attachment":[{"href":"https:\/\/uprisingradio.org\/home\/wp-json\/wp\/v2\/media?parent=1791"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/uprisingradio.org\/home\/wp-json\/wp\/v2\/categories?post=1791"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/uprisingradio.org\/home\/wp-json\/wp\/v2\/tags?post=1791"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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<\/a>GUEST: Dean Baker, Co-Director of Center of Economic and Policy Report, author of the report, “Midsummer Meltdown: Prospects for the Stock and Housing Markets”<\/em><\/p>\n