That’s the subject of a new book, Crisis Economics, by Nouriel Roubini, the New York University economics professor who famously warned about the housing bubble that began to break in 2007. He discusses “how and why markets fail.” He blames the financial meltdown on “the mantra of free markets” and “decades of free market fundamentalism.” He declares that “in the future, central banks must proactively use monetary policy and credit policy to rein in and tame speculative bubbles.”
One problem with this view is that the government officials who were supposedly watching out for us failed to see the housing bubble develop, and they didn’t do anything about it. For example:
- On April 17, 2002, Federal Reserve chairman Alan Greenspan downplayed the idea of a housing bubble.
- On March 4, 2003, Greenspan stated that “any analogy to stock‐market pricing behavior and bubbles is a rather large stretch.”
- In spring 2004, the Federal Deposit Insurance Corporation declared: “There is no U.S. housing bubble … it is unlikely that home prices are poised to plunge nationwide.”
- On Oct. 19, 2004, Greenspan expressed the sunny view that the run‐up of housing prices and housing debt wasn’t “overly worrisome.”
- In December 2004, the Federal Reserve Bank of New York reported: “The most widely cited evidence of a bubble is not persuasive … a bubble does not exist.”
- On Jan. 28, 2007, Federal Reserve chairman Ben Bernanke testified before the Senate Budget Committee about financial trends. He didn’t say a word about a possible bubble. He expected that “the budget deficit may stabilize or moderate further over the next few years.”
- In April 2007, the International Monetary Fund issued a report that said “the overall U.S. economy is holding up well.” The IMF suggested “the continuation of strong global growth as the most likely scenario.”
Greenspan, Bernanke, and others look like dummies for not seeing a bubble that’s obvious to us now. But since they’re smart guys, it would be reasonable to suppose that recognizing a bubble might be hard, and that government officials could have difficulty protecting us.