NEW YORK (Reuters) - America’s housing debacle was both highly predictable and easily preventable, and those who failed to spot it can no longer be relied upon as experts, according to a new book.
In “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” Dean Baker gives readers some basic metrics that clearly show the market was overly ebullient.
Baker, of the progressive Center for Economic and Policy Research, also outlines a set of policies, including taxes on financial transactions, that might prevent similar episodes in the future.
“Underlying all of these developments was an incentive structure that placed an enormous premium on short-term profits, often at the expense of longer-term profits or even long-term corporate survival,” Baker writes.
As far back as 2002, Baker wrote a series of articles that argued house prices were out of whack. In one instance, when Ben Bernanke had just been nominated to lead the Federal Reserve, Baker penned a paper rhetorically entitled “Will a Bursting Bubble Trouble Bernanke?”
There is plenty of blame to go around when it comes to this crisis, Baker writes. Economists bear much of it, for not paying attention to the data that was available to them, and for extrapolating the recent run-up in house prices into the future.
But the financial press also shares some culpability, for mistaking industry advocates such as David Lereah, the National Association of Realtors’ upbeat chief economist, for impartial observers.
“Somehow it never occurred to reporters that the chief economist of the NAR was in the business of selling real estate,” Baker notes. “Otherwise, they might have viewed his prediction of ever rising house prices a bit more skeptically.”
With the economy still in the doldrums, it’s not too early to start thinking about how to avoid repeat performances.
“We can’t undo the damage, but we can try to create a system that will prevent such catastrophes from recurring and that ensures that people responsible for these preventable events are held accountable,” he writes.
To this end, Baker proposes a small tax on financial transactions, which he says would not affect long-term investors and discourage “hot money” from moving too rapidly in and out of a certain type of asset in a disruptive manner.
This would not only address the problem of bubbles but also help the government raise much-needed revenues.
Baker also says financial institutions that are considered too big to fail must in all instances be regulated. He proposes a voluntary system that would condition help from the Federal Reserve, in the form of access to its discounted loans, on complete oversight.
Firms would therefore be allowed to remain completely outside the sphere of government influence, but would then also be shut out from government help. In the current crisis, many of the firms that were bailed out by the Fed were not actually regulated by the central bank.
An even more basic step is what Baker calls “keeping the incompetents accountable.”
“In no other sector of the economy is pay for top executives more bloated than on Wall Street,” Baker writes. “And nowhere is compensation less connected to performance.”
Reporting by Pedro Nicolaci da Costa; Editing by Eddie Evans