Dean Baker claims:

No one will lend me $1 billion, that's how bad the credit crunch has gotten. There are probably reporters at major news outlets who would print that.

The news media almost completely missed the housing bubble. They relied almost entirely on sources who either had an interest in not calling or attention to an $8 trillion housing bubble or somehow were unable to see it. As a result they did not warn the public that their house prices were likely to plunge in future years.

Having dismally failed in their jobs to inform the public, reporters are still relying almost exclusively on sources that completely missed the housing bubble. As a result, they are still badly misinforming the public, first and foremost by attributing the economic downturn to a credit crunch.

Ryan Avent does an ample job of demonstrating why this is silly.  Yes, people are probably spending less because their house has gone down, reducing their assessment of their position in the lifetime savings cycle.  That's a wealth effect, and I don't think any journalists are denying it.

But I do have to pile on a little, because denying that we're having a massive credit crunch is bizarre, like having lunch with someone who thinks the earth is flat, or doesn't believe in marriage.  Seriously, I've seen it--hell, my parents were married.  It's out there.  And frankly, it's scary as hell.

One hopes that one has similarly misunderstood Baker's post.  But it does seem, on its face, very certain that the credit crunch is a minor diversion from the real problem of consumers impoverished by falling house prices.  But Mr Baker . . . well, seriously--it's out there.  I've seen it.  A money market fund really did break the buck and spur a massive run in the commercial paper market.  Libor spreads really did start acting like your Cousin Becky when she comes for a week at Christmas and forgets to pack the lithium.  Several major banks were forced to sell themselves at fire sale prices or liquidate because their credit had dried up.  These things really happened.  If you think the teevee might have faked them the way they did the Moon Walk and Ronald Reagan's presidency, there are a variety of other sources you could check with.  But unfortunately, it wasn't all just a bad dream

The popping of the subprime bubble undoubtedly precipitated the crisis, much as the 1929 stock market crash became the focal point for the financial crisis that followed.  But given what's happening to banks abroad, it's getting harder to argue in good conscience that the housing crash caused the financial crisis; the system simply seems to have been in such a state that some adverse market movement was destined to take it down.

I don't know why Dean Baker seems not to have noticed these things.  I also don't know why he seems not to have read the financial press, which is talking to plenty of people who predicted the housing bubble.  Indeed, it's hard not to, because most people in the finance community thought the more exotic subprime mortgages were pretty creepy, and most economists were pretty sure it was going to crash.  Unless I were allowed to rely exclusively on David Lereah (until recently the permabullish economist for the National Association of Realtors) I would be hard put to find one economic expert who had completely missed the housing bubble, much less write an entire article consulting no one else.  I wish Dean Baker had provided a link to some of the overwhelming number of journalists who have managed to do so, if only so I can track down their sources for the obligatory idiot quote.

If what Dean Baker means is that we're relying on sources that didn't see the housing bubble causing a liquidity crisis in the banking sector that triggered worldwide chaos, well, no, we're not interviewing any of those, because AFAIK, there aren't any.  There are people, like Nouriel Roubini, who called a US financial panic, but saw it coming from the dollar (among other things--the trigger tended to change, though his prediction of panic did not), not the housing market; the dollar is actually strengthening right now.  (To the shock of a lot more people than just Nouriel Roubini).  There are people like Robert Shiller, who predicted moderate-to-enormous problems when the housing bubble collapsed.  But those predictions were along the lines of what Baker bizarrely insists is the actual case:  a wealth effect cutting into consumer spending.  Even Robert Shiller does not think this is the whole, or even the greater part, of what is happening, which Baker or his readers could discover by listening to the many, many interviews he has given.  I particularly recommend his one hour podcast with Russ Roberts.  I've interviewed Shiller about the housing markets for stories several times, and Russ Roberts really drew out some interesting observations.



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