Economists still puzzled by 2008

Robert Schiller, who chronicled the rise of housing prices that led up to the 2008 crisis, still can’t figure out why it happened. Neither, apparently, can any of his fellow economists.

There is still no consensus on why the last housing boom and bust happened. That is troubling, because that violent housing cycle helped to produce the Great Recession and financial crisis of 2007 to 2009. We need to understand it all if we are going to be able to avoid ordeals like that in the future. But the explanations for what happened in housing are not, I think, to be found in the conventional data favored by economists but rather in sociologically important narratives — like tales of getting rich through “flipping” houses and shares of initial public offerings — that constitute the shifting mentality of the era.

Strange, that the professional economists can’t determine the cause 7 years after it happened, and 15 years after I warned that it was going to happen. As those who have Collected Columns Vol. 1, Innocence & Intellect know, I wrote the following in 2002:

There can be little doubt that the implosion of the equity markets will soon be followed by the pricking of the credit and real estate bubbles. As great financial houses such as Citigroup and JP Morgan Chase teeter on the edge of bankruptcy, it is well within the realm of possibility that the triple whammy of the equity, credit and real estate implosions will lead to the collapse of the entire global financial system. 

Complete collapse of the system was staved off by the bank bailouts combined with the easiest monetary policy in human history. But the system was not fixed. Far from it. The new stock market highs we are seeing today are not the result of a strong economy, but rather, a perilously fragile one that is subject to the very same catastrophic failure that was narrowly averted in 2008.