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Oct 26 / Jonathan

Bubble, not crunch!

Dean Baker.

The Recession Is Not Caused by the Credit Crunch!!!!!!!

NPR just reported on Morning Edition that the markets are plummeting because investors are realizing the seriousness of the damage caused by the credit crunch. This calls for an extra long arghhhhhhhhhhhhhhhhh!!!!!!!!!!!!!!!!

The economy is not in a recession because of the credit crunch. The economy is going into a recession because of the crash of the housing bubble. Homeowners are losing on the order of $8 trillion in housing bubble wealth, $110,000 per homeowner. For most families, this is most of their wealth.

It was this housing bubble wealth that drive consumption and pushed the savings rate to near zero over the last four years. Now this wealth is disappearing and people are cutting back their consumption. In many cases they no longer have the ability to consume, since many households were borrowing directly against their home equity to finance their consumption. In other cases, they now realize the need to save, since they are approaching retirement and have nothing to rely upon other than their Social Security.

NPR completely missed the housing bubble on the way up. They relied almost exclusively on economists that did not know what they were talking about. Can’t they find an economist who at least now can recognize the impact of the collapse of the housing bubble? The horror, the horror.

—Dean Baker

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