Let our journalists help you make sense of the noise: Subscribe to the Mother Jones Daily newsletter and get a recap of news that matters.

In a review of Dean Baker’s False Profits, Daniel Davies notes that although Wall Street’s infamous financial legerdemain (along with dollops of occasional fraud) helped to amplify the financial bubble that crashed to earth in 2008, it wasn’t the primal cause:

It’s necessary to be clear here — the original sin here was the real estate bubble, a bubble which could and should have been the object of anti-bubble policy, and which wasn’t, because of a massive, ghastly policy error on the part of the Federal Reserve. This is Dean’s thesis, and he names the guilty men.

….None of the arguments made by housing bulls during the bubble made a lick of sense, for the simple reason that the ratio of house prices to rents was constantly increasing — any fundamental change in the economics of housing ought to have shown up equally in the rental market as in the market for house purchase, and the “buy versus rent calculation” wasn’t an anomaly or a quirk — it was a simple and easily comprehensible piece of information showing that prices were in a bubble, which was almost universally ignored.

There’s a lively debate in the economics community about whether it’s possible to recognize bubbles as they’re happening. For example, we still don’t know for sure if the 2007-08 oil runup was a bubble or whether it was caused by fundamental issues of limited supply and rising demand. (Probably a bit of both, it turns out.) But as both Dean and Daniel point out, housing is different. In the housing market there are several well known and historically rigorous metrics that do a pretty good job of telling you whether prices have become untethered from reality. The ratio of price to rents is the most fundamental, but there’s also price-to-median income and mortgage payments as a share of income. By 2002 all three had started to rise dangerously, and by 2004 they were plainly in bubble land. Even if it’s true generally that bubbles are hard to distinguish reliably, this one was easy.

I’ve mentioned before that I sort of waffle about how important all the other stuff was (the overseas savings glut, the credit derivative free-for-all, reckless abuse of leverage, ratings agency corruption, etc.), but no matter how important it was, the housing bubble was plainly the ur-cause underlying everything else. The Fed should have been doing something about it, not egging it on.


Headshot of Editor in Chief of Mother Jones, Clara Jeffery

It sure feels that way to me, and here at Mother Jones, we’ve been thinking a lot about what journalism needs to do differently, and how we can have the biggest impact.

We kept coming back to one word: corruption. Democracy and the rule of law being undermined by those with wealth and power for their own gain. So we're launching an ambitious Mother Jones Corruption Project to do deep, time-intensive reporting on systemic corruption, and asking the MoJo community to help crowdfund it.

We aim to hire, build a team, and give them the time and space needed to understand how we got here and how we might get out. We want to dig into the forces and decisions that have allowed massive conflicts of interest, influence peddling, and win-at-all-costs politics to flourish.

It's unlike anything we've done, and we have seed funding to get started, but we're looking to raise $500,000 from readers by July when we'll be making key budgeting decisions—and the more resources we have by then, the deeper we can dig. If our plan sounds good to you, please help kickstart it with a tax-deductible donation today.

Thanks for reading—whether or not you can pitch in today, or ever, I'm glad you're with us.

Signed by Clara Jeffery

Clara Jeffery, Editor-in-Chief

payment methods

We Recommend