"The Media and the Economic Collapse: Columbia Journalism Review Edition
Regular BTP readers know that I give the media much of the blame for the economic collapse, although I give my fellow economists even more. After all, knowing the economy is all they do for a living and they were completely clueless in missing an $8 trillion housing bubble. As they say back in Chicago (my home town): how stupid can you get?
Anyhow, in its latest issue, the Columbia Journalism Review has a piece by Dean Starkman that takes the media for task for missing the crisis. While the piece makes many good points, I would argue that it is still too generous. The investigative reporting into the dealings of the Wall Street banks advocated by the piece would have been desirable, but it was unnecessary. All we needed was reporters who knew arithmetic.
The basic point is that we saw a 70 percent run up in inflation-adjusted house prices nationwide, after 100 years in which house prices had just tracked inflation. There was no remotely plausible explanation for this sharp divergence from a 100 year long trend in the largest market in the country. Furthermore, it was not matched by an remotely comparable increase in rents, which continued to largely track inflation.
The implication was that we had a housing bubble that had generated $8 trillion in housing wealth (an average of $110,000 per homeowner). This was guaranteed to end badly even if every bank had kept good books, there were no complex derivative instruments, and no deceptive subprime mortgages. The U.S. economy was being driven by this bubble and it was sure to crash when the bubble burst.
Of course the bubble would not have grown to such an extraordinary size had it not been for the banks bad practices and outright fraud, but the latter required at least some investigative work. The core problem was an $8 trillion housing bubble that was standing there in the full light of day. The fact that so many business and economic reporters somehow could not see this is even more damning than their failure to highlight the corruption of the Wall Street boys. After all, if you can't see an $8 trillion housing bubble, what can you see?