Busted Bubble

The press fell down on the job on housing prices

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

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,
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

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

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.

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