Amy Traub

Who Knew?

It's just terrible luck. In the last few years, our nation's wise and farsighted public policies have been continually undermined by random events that no one could in any way have foreseen or prepared for.

"I don't think anyone could have anticipated the sectarian violence."

"I don't think anybody anticipated the breach of the levees."

And most recently, Angelo R. Mozilo, CEO of the nation's largest mortgage lending company, on the ongoing collapse of the housing bubble: "Nobody saw this coming."

Of course, in all of these cases, many people not only foresaw the potential for disaster, but made practical suggestions for averting it. Policymakers simply didn't choose to listen. Which leads us to the question of what we might be missing right now, and what we could be doing about it.

Dean Baker, co-director of the Center for Economic Policy Research, is one of those people who saw the bursting of the housing bubble coming years ago and had some ideas about how to mitigate the damage. While many mainstream pundits and analysts are still speaking hopefully of a "soft landing" for housing markets, Baker sees a recession looming, possibly a severe one.

In a report released in August, Baker notes that residential construction alone accounts for about 5% of the U.S. economy. Then we have consumer spending, partially fueled in recent years by people borrowing against the value of their homes to sustain a higher standard of living than they could otherwise afford. State and local governments will be harmed by the loss of property tax revenue. Not to mention the vast majority of American homeowners, whose house is by far their most valuable asset, and who planned their retirement based on the widespread assumption that it would hold its value.

Because the fundamental problem is that housing prices are overvalued, Baker notes, it is inevitable the that problems in the sub-prime mortgage sector will spread into the rest of the housing market.

That brings us to what we can do about it. The bad news is that there's no way to stop the bubble from bursting. Overvalued housing prices must come down to earth eventually. From the point of view of home owners and prospective buyers, it's better to get the correction over as quickly as possible. From the perspective of the economy as a whole, it's best if it deflates gradually. But in the meantime, Baker has a proposal for making sure that at least people entrapped by predatory mortgages don't get thrown out of their homes. It would save neighborhoods from the blight of widespread foreclosures and it doesn't involve bailing out the banks that made irresponsible loans to begin with.

Of course, it's possible that we've seen the worst already and actually have nothing more to worry about when it comes to the housing sector. After all, President Bush is confident that the problems are "modest" and "America's overall economy will remain strong enough to weather any turbulence." Perhaps he doesn't know anyone who could anticipate things getting worse.

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Posted at 6:51 AM, Sep 07, 2007 in Economy | Financial Justice | Housing
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