Ramesh Ponnuru throws conventional wisdom on its head with a new piece at Bloomberg that not only questions the idea that we are currently in a housing bubble, but also the idea that one caused the 2008 financial crash…(Bloomberg)
Conventional wisdom on the Great Recession is that loose lending standards (aka subprime loans) incentivized investors to retarget capital towards housing which led to an explosion in homebuilding. However, when subprime loans began to default the increased homebuilding led to a housing glut which turned a correction into a collapse. Ponnuru argues there is more to the story.
Ponnuru points to Kevin Erdmann’s new book “Building from the Ground Up” in which Erdmann argues that “spending on housing didn’t grow any faster than spending on other consumption goods during the boom (or the preceding decades). The notion that the price increases of 2000-2007 were unsustainable, he points out, also doesn’t match the experience of other countries.”
- Erdmann notes that in some markets home prices rose too quickly but “…these spikes were a function of too little homebuilding, not too much.”
So what caused the crash? Ponnuru explains “that the Federal Reserve erred from late 2007 onward by failing to loosen monetary policy enough after initial signs of economic weakness, sending tightening signals to markets as the crisis developed…”
- Erdmann also notes that that the Fed erred in misdiagnosing housing as the main culprit in the economic collapse. Ponnuru writes that this is misdiagnosis could still be happening today, “…it is possible that insufficient supply was, and still is, a bigger problem than excessive demand.”
For 14 years it has been ingrained in our heads that we just built too much before the crash and that ended up exacerbating the collapse, instead of helping. However, as we now all are keenly aware, we have been underbuilding for decades. Ponnuru finally answers the big question many have had this last year. If we’ve been underbuilding for decades, how could we have been overbuilt in 2008? Turns out we weren’t.