Truthdigger of the Week: Dean Baker

http://www.truthdig.com/report/item/truthdigger_of_the_week_dean_baker_20121215/

“We all misjudged the risks involved,” former Federal Reserve Chairman Alan Greenspan said in March 2010 of the housing bubble that led to the financial crisis. “Everybody missed it—academia, the Federal Reserve, all regulators.”

It’s not true. A paper published in 2002 by Dean Baker, co-founder of the Washington D.C.-based Center for Economic and Policy Research detected some clues, reporting that the rise in housing prices in the previous seven years exceeded what was expected given other aspects of the economy.

“There is ... no obvious explanation for the increase in home purchase prices relative to rental prices,” Baker wrote in the paper’s conclusion. “In the absence of any other credible theory, the only plausible explanation for the sudden surge in home prices is the existence of a housing bubble. This means that a major factor driving housing sales is the expectation that housing prices will be higher in the future,” meaning that while “this process can sustain rising prices for a period of time, it must eventually come to an end.”

Four years later, almost a year before the crisis hit, Baker published another paper that predicted the collapse of the bubble would drive the American economy into recession.

Link to Dean’s 2006 paper mentioned in the above article:

http://www.cepr.net/documents/publications/forecast_2006_11.pdf