Economists did see the bubble coming

Economists have been lambasted for not alerting the public that a bubble was in the making in US real state, except for a few oddballs. Of course everyone is wiser in hindsight, but what did economists actually say? It never hurts to look at the facts.

Martha Starr analyzes statements in 24 California newspapers from 2002 to 2007. From 1998 to 2005, the state's house prices increased by more than 10% each year. This prompted the newspaper to run 379 stories with 688 statements by economists on house prices. Academics were clearly warning that house prices were not sustainable. Economists employed in the real-industry, however, were resolutely optimistic. What emerges is a mixed message that gave no guidance to the public, which was even reassured by positive messages from the Federal Reserve.

It is entirely possible opinions could have diverged based on the same evidence. But it seems more likely the professionals were not acting in good faith. They had everything to lose from predicting an end of house price growth. The media should have learned not to trust such biased speakers, yet they continue to be interviewed. Now as to why Greenspan and then Bernanke were so optimistic is beyond me. There speeches are definitively strategic and while they may have realized there was a problem, they may have tried to prevent a bubble from bursting too brutally. Then all the credit to them for trying. But one cannot postpone indefinitely a bubble from bursting, and they knew that.

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