Economist Dean Baker, co-director of the Centre for Economic and Policy Research, based in Washington DC, explains what the United States could have done to rein in its housing bubble. Some lessons for Malaysia here, I think.

The main lesson here is to call a spade a spade – that is, to acknowledge there is a bubble and promote awareness of it – and then to act on it.

This excerpt is from Aljazeera.

… some quick points on what could have been done. First, the Fed has responsibility for maintaining the stability of the US economy. Alan Greenspan should have recognised the bubble and done everything in his power to burst it before it grew to such dangerous levels.

A preventable crisis

Step one in this process should have been to document its existence and show the harm that its collapse would bring. This means using the Fed’s huge staff of economists to gather the overwhelming evidence of a bubble and to shoot down anyone who tried to argue otherwise. Greenspan should have used his Congressional testimony and other public appearances to call attention to the bubble.

This would have put the bubble clearly on everyone’s radar screen. And, the reality was that there were no serious counter-arguments. It is difficult to believe that this action by itself would not have slowed the home buying frenzy and curbed the issuance of junk loans, or at least their repurchase for securitisation.

Second, the Fed has enormous regulatory power beginning with setting guidelines for issuing mortgages. They first issued draft guidelines in December of 2007. It was not hard to find abusive and outright fraudulent practices in the mortgage industry, if anyone in a position of authority was looking for it.

Finally, the Fed could have used interest rate increases as a mechanism to rein in the bubble. This should have been a last resort, since higher rates would have slowed the economy at a time when it was still recovering from the collapse of the stock market bubble.

To maximise the impact of any rate increases, Greenspan could have announced that he was targeting the housing market. He could have said that he would continue to raise rates until house prices were brought back to a more normal level.

This surely would have gotten the attention of the mortgage industry and potential homebuyers. Would it have been an extraordinary action from a Fed chair? Sure, but so what? It might have prevented the economic devastation that is now ruining tens of millions of lives. If this required Alan Greenspan to deviate from the standard script for Fed chairs, that would have been a very small price.

(Thanks to blog visitor Phua Kai Lit for the link.)

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9 COMMENTS

  1. When this bubble bursts which may happen anytime now…..Najib’s government must never use even one cent of our tax payer’s monies to bail out these banking rogues……the culprits are out merged monopolised banks…all the other criminals i this housing scam like the developers,local authorities etc are accessories to the crime……

  2. Hi Mr Anil

    My name is Phua Kai Lit (not Phua Lai Kit. Perhaps Lai Kit is my long lost brother? 🙂

  3. Why would they want to prevent the bubble? Capitalism buys the best government money can buy. Today, the banks are fewer and bigger, there is greater fear of their collapse (and hence willingness to rescue them, e.g. by squeezing European goverments), the pay of bank execs is much larger, and there has been no substantial improvement in controlling their gambling.

    • The new slavery of the 21st century – a lifetime of financial debts to banks & ah longs.
      But many are not ‘educated’ to avoid this kind of slavery which can be a lifelong suffering in the name of lifestyle upgrading & instant satisfaction influential in Bing Chui urban cities & cosmopolitans.
      Even education at tertiary level is not spared for the students in the form of student loans for ‘expensive’ courses taught by lecturers from Earth (not Mars) & no different from private medical fees set at exorbitant prices.

      Soon the financial structure of financial institutions will self-implode due to excessive greed of lending for massive profiteering thro’ questionable mortgages, sub-prime ‘crimes’ & free-flow of credit cards to high-risk borrowers. Big is not infallible. Take a lesson from David & Goliah history.

      5 years ago, prices of luxury cars far exceed those of affordable homes.
      Now, it is the reverse. No wonder household debts are doubly increasing by the days, not years.

      Still buy the idea of global free market economy of rampant greed & legalised manipulation?

  4. But the property consultants (via seminars and property shows) and magazines in Malaysia are still telling people that there are still money to be made in property investment cum speculation.

      • Housing industry is the ‘in-thing’ for career-business development, the much touted new speedy wealth creation echoing from the gold-plated pulpits of consultants in hotel ballrooms.

        Not much different from property gurus giving rainbow speeches at Love Lane corner to rainy green-horned wildebeests chasing after new housing launches at any developer’s handed down prices. Even a 10% increase in fuel price warrants a 10% increase in new home price tags.

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