Busted Bubble

The press fell down on the job on housing prices

by Veronica Cassidy

Over the summer, the country's two mortgage giants, Fannie Mae and Freddie Mac, collapsed, marking the definitive bursting of the housing bubble that began in the mid-1990s. Although it was the second major economic bubble in less than a decade, most in corporate media ignored the warning signs.

Dean Baker, co-director of the Center for Economic Policy and Research (CEPR) and author of the American Prospect blog Beat the Press, told Extra!: "It continues to be this sort of bad-event story," with corporate media and the select group of economists on whom they rely acting as though "a hurricane came and wiped out Fannie and Freddie."

But journalists shouldn't have been so surprised. As early as 2002, Baker, along with other economic experts like Robert Shiller, Edward Leamer and Doug Henwood, and a network of blogs such as Housing Bubble Blog, warned that soaring housing prices represented a speculative bubble-one that was bound to pop.

Immediately following the collapse of the stock market bubble, Baker became concerned about the remarkable growth in the value of housing nationwide (Economic Reporting Review, 4/8/02). Normally, increases in the price of real estate are in line with the rate of inflation (CEPR, 8/13/03; Irrational Exuberance, Robert Shiller, 2005), but as Baker pointed out in 2003 (L.A. Times, 12/18/03), housing prices had outpaced inflation by some 35 percentage points since 1995. Yet there had been no significant population boom or increase in wages on the demand side, and no shortage of housing on the supply side, to explain this trend. "The bubble will eventually burst," he warned, "leading to another recession and destroying the main source of savings for tens of millions of families."

But, with occasional exceptions (e.g., "Now you can start worrying about the housing bubble"-New York Post, 10/22/02), corporate media had already established themselves as cheerleaders for the thriving housing market. The Washington Post's Kenneth R. Harney (9/7/02) declared: "To all Chicken Littles predicting a collapse in home values: Check out the national appreciation data released this week and weep. The end of the country's unprecedented housing boom is nowhere in sight."

That same month, columnist Richard Mize of the Oklahoman (9/21/02) accused Wall Street of starting a "whisper campaign . . . fanning talk of a housing price bubble" so that people would divert their investments back into financial markets:

Is someone deliberately trying to tarnish real estate's shine as a good investment? . . . David Seiders, chief economist for the National Association of Home Builders, detects a bubble drumbeat from somewhere-and if the murmuring is coming from Wall Street, he said, it's "disgraceful."

Even when they did acknowledge the possibility of a bubble, given record home prices, media reassured the public that it wasn't something to be terribly concerned about. "Most experts say the housing boom will end without a crash," reported the Atlanta Journal-Constitution's Michael E. Kanell (5/31/03). "Instead, price increases will slow." (It wasn't the only misguided bit of optimism from Kanell, who led an earlier piece-5/28/03-with the suggestion that strong home sales the previous month were "perhaps the most hopeful sign yet for postwar [sic] economic hopes.")

No room for skeptics
When construction declined in 2005, more corporate journalists began to look critically at the bubble. The New York Times' Martin Fackler (12/25/05), for example, found lessons in Japan's disastrous housing boom and bust. "Their experiences contain many warnings," he wrote. "One is to shun the sort of temptations that appear in red-hot real estate markets, particularly the use of risky or exotic loans to borrow beyond one's means."

Most media reports, however, continued to deny the existence of a bubble. The Chicago Tribune's Andrew LePage (8/27/05) summarized a report by the Mortgage Bankers Association (MBA), a group with significant interest in the continued success of real estate:

Much of what's being said and written about a possible home price bubble is overblown, but the housing market does face "a number of risk factors" that should be viewed with caution instead of panic, the nation's largest association of mortgage lenders said Tuesday.

The report went on to provide numbers from the equally self-interested National Association of Realtors (NAR) that supported the MBA's argument, while excluding critical viewpoints.

The next month, the L.A. Times (9/25/05) featured a short summary of a study by the Columbia Business School and the University of Pennsylvania's Wharton School of Business under the headline "Housing Bubble a Myth, Study Says." The piece concluded: "No evidence was found that buyers are bidding up the price of houses based on unrealistic expectations of future increases." Like the Tribune, the Times ignored contradictory evidence.

Most financial reporters are not themselves economists, and rely for expertise on a select group of economic "authorities." In the housing story, these were often economists with clear stakes in the housing market, whose opinions were frequently unaccompanied by opposing viewpoints. A search of the Nexis news database on July 30, 2007 (CEPR, 8/07) found that in 2005 and 2006, there were 397 media citations for Doug Duncan of the MBA, 652 for David Seiders of the National Association of Homebuilders and 1,796 for David Lereah, an economist with the NAR and author of Why the Real Estate Boom Will Not Bust and How You Can Profit From It. In contrast, there were just 852 total citations for the three leading economists voicing doubt about the sustainability of the housing boom.

Part of the problem was most corporate business reporters' uncritical coverage of statements from the Federal Reserve, whose performance during the bubble proved the need for journalistic skepticism. Then-Fed chair Alan Greenspan warned in a private meeting with Fed officials in November 2002 (Washington Post, 6/15/08) that "our extraordinary housing boom . . . financed by very large increases in mortgage debt, cannot continue indefinitely into the future," but several years later, in public, "emphasized that there was no nationwide housing bubble" (New York Times, 12/25/05), only "froth"-a series of small, local bubbles.

Greenspan actually enacted policies that encouraged fast and easy mortgage loans-no surprise from a man who in 1996 claimed bubbles could only be detected after they popped (New York Times, 12/25/05) and who, in the aftermath of the stock market crash, "said it is unrealistic to expect the Fed to identify a bubble in stock or real estate prices as it is inflating, or to be able to pop it without hurting the economy. Instead, the Fed should stand ready to mop up the economic aftermath of a bubble" (Washington Post, 10/27/05).

Predicting a case of hiccups
As evidence of a housing bubble grew more difficult to ignore, most elite journalists stuck to their industry-heavy rolodexes and downplayed the potential severity of the collapse. In the New York Times' business section, "Your Money" columnist Damon Darlin (7/15/06) quoted only real estate industry insiders to conclude that while a housing downturn may be painful on a personal level, "economists say even the worst-case outcome will not have much impact on the overall national economy," since mortgage industry losses would be but "a hiccup in the gross domestic product." The paper soon after (8/24/06) published another article, by Jeremy W. Peters, that relied on economists who predicted that, at worst, the housing market would merely return to normalcy.

New York Times columnist Roger Lowenstein (3/18/07) questioned whether there really was a bubble, but concluded that either way, a bursting bubble would be "less painful than would a good old-fashioned recession."

Even as recently as August 15, 2008, Times reporter Geraldine Fabrikant informed readers, "Few expect the scale of the current crisis to approach that of the 1980s [savings and loan] debacle, in which 2,000 banks and savings and loans were eventually closed"-though her fellow Times reporters Vikas Bajaj and Edmund L. Andrews predicted even worse almost a year earlier (10/25/07), writing that the housing crisis was likely to cost firms and investors $400 billion-far more, adjusting for inflation, than the $240 billion lost during the savings and loan crisis.

Kudos for waking up late
Despite their long-running denials, corporate media have finally acknowledged the housing bubble, although, much as with the absence of WMDs in Iraq (Extra!, 7-8/03), their coverage tends to imply that it would have been next to impossible to identify the problem before it became disastrously self-evident. One Wall Street Journal article (11/19/07) began: "Fannie Mae and Freddie Mac are proving more vulnerable than expected to anxiety over rising mortgage defaults." That's true enough-if you had relied on the expertise of the real-estate industry to gauge how vulnerable they were.

Corporate media have used that logic to distort the timeline of the housing crisis, applauding themselves for being "early" skeptics of the housing bubble. TV investment guru James Cramer patted himself on the back in his New York magazine column (9/15/08) for being a bear on the housing market-all the way back in 2007:

For more than a year, I've been a huge bear on housing. From the moment the credit-crisis storm began to form, I've been shouting in my usual unhinged way about just how bad the devastation would be, and carrying on about how anyone who bought a home in this environment would lose money immediately. At various points along the way, my house-hating judgment has been questioned, but I'd say I've been vindicated by the relentless decline in home values we've seen, the worst since the Great Depression.

Two weeks later (9/28/08), the Times' David Carr wrote a piece lauding Alex Blumberg, producer of Public Radio International's This American Life, and NPR business reporter Adam Davidson for starting to ask questions about the housing bubble in 2006. "Mr. Blumberg and Mr. Davidson were hardly the only ones asking questions," Carr wrote.

Nearly 19 months ago, under the headline "Mortgages May Be Messier Than You Think" [3/4/07], my colleague Gretchen Morgenson wrote, "As is often the case, only after fiery markets burn out do we see the risks that buyers ignore and sellers play down."

Of course, 2006 or '07 was actually late in the housing bubble-as Morgenson could have told Carr, having written stories like "Mortgage Markets Are Out of Control" (8/17/03) and "Housing Bust: It Won't Be Pretty" (7/25/04) years earlier. In large part thanks to Morgenson, the New York Times did a better job than most outlets covering the housing mania, but that hardly justifies Carr's general absolution of the media: "After large-scale financial disasters, the press is usually criticized-often justly-for ignoring the problem, but it's hard to make that case with the subprime mess. If no one saw this coming, they were not looking."

Let's move on
As the magnitude of the housing crisis became increasingly clear, many in corporate media urged citizens to support an immediate bailout of Wall Street, presented as a somewhat unfortunate but necessary measure to save the economy on Main Street.

An unsigned editorial in the Boston Globe (9/20/08) summed up: "The bailout may be the least noxious option-the only way, indeed, to prevent world financial markets from falling into chaos. And yet the whole idea is still galling." USA Today declared (9/29/08) in a headline: "Rescuing Wall Street stinks, but hold your nose and do it." Proponents of the bailout drowned out the voices of those opponents who did appear in mainstream press (e.g., New York Times, 9/24/08), while most criticism appeared in the pages of right-wing outlets (e.g., New York Sun, 9/19/08, 9/30/08; Washington Times 9/25/08, 9/26/08).

Support of the bailout was often framed as a need to move on from past mistakes and focus on the future in order to save the economy. The New York Times' David Leonhardt wrote (9/30/08): "Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress . . . more interested in punishing Wall Street than saving the economy." In the same paper earlier that month, columnist David Brooks (9/19/08) dismissed the idea that the Fed could have mitigated the housing crisis while disparaging calls for strict oversight:

We're apparently going to need an all-powerful Super-Fed that can manage inflation, unemployment, bubbles and maybe hurricanes-all at the same time! We're going to need regulators who write regulations that control risky behavior rather than just channeling it off into dark corners, and who understand what's happening in bank trading rooms even if the CEOs themselves are oblivious.

We're also going to need regulators who can overcome politics and human nature. As [blogger Megan] McArdle notes, cracking down on subprime loans just when they were getting frothy would have meant issuing an edict that effectively said: "Don't lend money to poor people." Good luck with that.

Furthering media's "let's move on" attitude, the Washington Post ran an op-ed (9/14/08) by McCain adviser Donald Luskin that asked:

A housing "slump," a housing "crisis"? A "severe" price decline. . . . Home prices may not be at all-time highs . . . but overall they've clearly stopped going down and have started to recover. So why keep proclaiming a "crisis" after it's over?

In a similar vein, the New York Times (7/27/08) featured conservative critic Ben Stein, who asked:

But how bad is it, really? The economy isn't at its best. Oil prices are painfully high, foreclosures are really hurtfully high, job growth in many areas is sluggish or worse, and a sector of the credit markets is extremely weak. But over all, it's not all that bad.

Fed off the hook
When Treasury Secretary Henry Paulson said (AP, 1/7/08) that "after years of unsustainable price appreciation and lax lending practices, a housing correction is inevitable and necessary," and referred (AP, 2/12/08) to "the excesses of past years," reporters failed to ask why, if housing prices were so unsustainable and excessive, the Fed failed to step in (e.g., USA Today, 1/7/08; Washington Post, 2/14/08).

And although Greenspan has been increasingly criticized for his policies as Fed chair that contributed to the housing bubble (e.g., New York Times, 8/6/08), he continued to be widely quoted on the issue without mention of his disastrous track record on financial bubbles (e.g., Chicago Tribune, 9/28/08; Washington Post, 8/1/08). Similarly, Greenspan's successor, Ben Bernanke, who downplayed risk associated with the housing boom while on the Board of Governors of the Federal Reserve System, serves as one of corporate media's primary authorities on the housing crisis, too often without being held accountable for his erroneous position on the bubble (e.g., New York Times, 9/25/08, 9/29/08; USA Today, 9/8/08; Washington Post, 9/27/08).

It makes sense to include the views of the Fed chair in housing coverage. What does not make sense is relying almost solely on the expertise of those who got it wrong. Yet economists from the NAR, NAHB, MBA and other industry groups also continue to serve as voices of authority in much reporting (e.g., Chicago Tribune, 8/17/08; USA Today, 9/25/08).

Washington Post columnist Allan Sloan wrote on May 23, 2006:

I expect house prices to drift down-but not to crash. Here's why. The Greenspans and Bernankes of the world don't care what happens to you or me as individuals if we choke on too much housing debt. But they don't want millions of us to default on our mortgages en masse, because that could shock the financial system-and the Fed's job is to protect that system. Regulators can do what they did in the early 1990s to avoid having to close giant banks that were underwater: use their discretion. I think even if rates keep rising, we'll muddle through, avoid anything resembling a foreclosure crisis and end up with a soft landing.

Sloan demonstrates many journalists' belief that the Fed indeed could have prevented a housing crisis of this enormity. Why, then, aren't reporters holding the Fed accountable for its failure? In a notable exception, Paul Krugman in the New York Times (7/2/07) provided a critical voice:

And you would think that the regulators, in particular the Federal Reserve, would have learned from the stock bubble and the wave of corporate malfeasance that went with it to keep a watchful eye on overheated markets.

But apparently not. And the housing bubble, like the stock bubble before it, is claiming a growing number of innocent victims.

Boosters for the boom
Matthew Yglesias argued on his ThinkProgress blog (9/24/08):

By the winter of 2003-04, things had already reached a point where responsible public officials and other kinds of civic leaders should have been trying to inform the public and calm things down. Instead, politicians did nothing while the Fed encouraged housing prices. Meanwhile, the press was encouraging people to shift from a "these past seven years of price appreciations have been nice for incumbent homeowners" mentality to a mentality of rampant speculation.

Yglesias contended that the press "wasn't doing this by coincidence-they were doing it because of a corrupt relationship between their real estate coverage and real estate advertising revenue." Yglesias expanded on this argument, telling Extra!:

Many major newspapers covered real-estate issues in special dedicated real-estate sections (much as they cover food or movies or whatever) rather than in their news or business pages. And those sections were full of real-estate advertising. Unless the journalists assigned to write for the real-estate sections were total idiots, they would have understood that the purpose of creating a real-estate section is specifically to attract real-estate advertising. . . . Their job was basically to be boosters for the real-estate boom.

The "corrupt relationship" may help explain media's uncritical reliance on real-estate leaders for insight into the future of the housing market. In a rare moment of self-criticism, Washington Post media reporter Howard Kurtz, in an article headlined, "Press May Own a Share in Financial Press" (10/6/08), quoted Post columnist Steven Pearlstein:

The business press tends to get in with the people that they cover. . . . They get in the bubble that is Wall Street, just like political reporters get in the bubble that is the White House and the traveling press of the campaign . . . and they don't see the obvious things.

Compounding the problem, explained Dean Baker, is the fact that most prominent economists simply don't take the idea of economic bubbles seriously (TomPaine.com, 7/31/06). It is all the more imperative, then, that journalists do so. It is "mind-boggling" that executives at Fannie Mae and Freddie Mac could be paid so much to run their companies into the ground, said Baker. The same could be said of financial journalists who watched housing prices balloon and took years to blow the whistle.