Sometimes the obvious is just too easy an answer. â€œWeâ€ can quickly deduce why something happens but for reasons unknown, â€œweâ€ feel compelled to complicate the explanation. The â€œweâ€ is â€œtheyâ€; politicians, domestic business, international business, banks, Wall Street, the mediaâ€¦all of this brain power and yet there remains vigorous discussion on what led the economy into this deep recession and why itâ€™s taking so long to get back on track. Five years after the economic collapse, there remains a clear and obvious answer â€“ the housing bubble popped and dragged everything down. Quite simple and quite obvious, even to the real estate and economic "experts" ...even if they can't see the obvious.
Dean Baker hits it perfectly in a recent article:
Many economists and business writers view the duration and severity of the downturn as being a mystery. They argue that it has something to do with the financial crisis, although the exact nature of the relationship is often not quite clear, with the financial crisis looming as a dark cloud hanging over the head of an otherwise healthy economy.
Fortunately, for arithmetic fans the story was never very difficult. In the last business cycle the economy was being driven in large part by a housing bubble. The unprecedented run-up in nationwide house prices lead to booms in both residential construction and consumption. This was easy to see even before the bubble burst and should be completely apparent to everyone now. In the 1980s and 1990s before the bubble began to drive the housing market, residential construction accounted for an average of less than 4.4 percent of GDP. At the peak of the bubble-driven building boom in 2005, construction rose to more than 6.5 percent of GDP.
Many things happened after 9/11, one of them was a concerted effort to raise the rate of home ownership. Some observers commented that it appeared as if ownership were being made a â€œrightâ€; that the ease of money, relaxation of requirements and increased availability of inventory seemed to be a sanctioned process. We all know what happened as this played out and we all know what has happened since the bubble burst.
The $8 trillion in equity created by the housing bubble made homeowners feel wealthier. They consumed based on this wealth, believing that it would be there for them to draw on for their childrenâ€™s education, their own retirement or for other needs. When the bubble burst, homeowners cut back their consumption since this wealth no longer existed. However contrary to what you often read in the paper, consumption is not currently low, it is actually quite high when compared with any time except the years of the stock and housing bubbles.
In the decades of the â€™60s, â€™70s, and â€™80s, people on average consumed less than 90 percent of their after-tax income, meaning that the saving rate was over 10 percent. The share of income going to consumption rose sharply in the 1990s due to the stock bubble and then even more in the last decade due to the housing bubble. Consumption peaked at more than 97 percent of income in 2005.
America is no longer a manufacturingÂ power, we are a consumer nation. We are an economy that is based upon spending, not saving. Keeping it simple, unless we live within our means we run a deficit. Who couldnâ€™t see the disaster coming directly as a result of the housing bubble. Of course Wall Street, banks and even Washington are partially to blame, but letâ€™s not forget to assign personal responsibility. How many people bought homes they couldnâ€™t afford, used them as ATM machines, bled out every dollar and then realizedâ€¦uh oh? Some were caught by surprise, many others just didnâ€™t care and ran wide open until they ran out of moneyâ€¦.and then pointed fingers in every direction.
As Baker concluded:
A long and severe downturn was entirely predictable. There is no mystery about the downturn or the potential routes to recovery. The only problem is that the people in control of economic policy have no interest in taking the steps necessary to bring the economy back to full employment. And most of the people who write about the economy are doing their best to say that it is all just so mysterious since it is far too simple for them to understand. Happy 5th anniversary!
This is a worth a read â€“ unless you prefer the obfuscation and babble that â€œtheyâ€ spew.
Associate Broker & Certified Appraiser
Atlanta Communities Real Estate