Tuesday, July 26, 2011

Don't lump everyone together, Professor Summers

In his response to Mark Thoma's "Great Divide," post, Larry Summers writes:
Second, as Keynes’ comments on the advantages of being conventionally wrong rather than unconventionally right illustrate, it is a serious mistake to overstate the insights possessed by practitioners in any field.  Anyone in mutual funds will tell you that active managers regularly outperform the market.  Only economic scientists realized they do not.  Contrary to the the implications of Thoma’s column, the best calls on the real estate bubble came from academics like Bob Shiller and Nouriel Roubini, not from any economists involved with the home building or realty industries.
While Summers' point about Bob Shiller and Nouriel Roubini is correct (and what was particularly impressive is that they explained the mechanisms that would create the destruction), he does not acknowledge that non-academic economics, such as Dean Baker and Chris Thornberg, also called the bubble.  On the other hand, lots of academic economists did not see the crisis coming (I certainly did not see the magnitude of it).

It is, moreover, not fair to lump Realtors and homebuilders together.  The Realtors' Chief Economist at the time (whose name I shall not mention) was ridiculous.  But while Dave Seiders, Chief Economist at the time with the National Association of Homebuilders, did not get it right, he did not do badly either.  I remember being impressed with NAHB at the time, because they were not being cheerleaders--they seemed to me to be playing things pretty straight down the middle.


TStockmann said...

On the other hand, lots of academic economists did not see the crisis coming (I certainly did not see the magnitude of it).

Professor Green:

I've read your blog for a long time, and I think this understates your error. Your first substantive post was specifically skeptical about a housing bubble.

The next year you said:

One bright side: when the commerical real estate market collapsed in the early 1990s, some analysts thought it would take a decade to recover--instead in took around 3-4 years to do so. Strong population growth in Arizona and Neveda should put some cushion underneath those markets (although the slowdown in Florida's population growth will further weaken a market that is already pretty devastated).

and the year after:

-The taxpayer, holding 80 percent of the company, gets susbstantial particiation in any upside (which in Freddie and Fannie's case, I think likely).

The bubble, Arizona and Nevada, Freddie and Fannie...

There are many more clouded-crystal-ball posts, almost always on the side of optimism. And you're not only a highly respected academic economist at a first rate institution, but specialize in real estate. And I don't mean this as an entirely negative thing, not at all. To adapt Freeman Dysan you were at least wrong, a very valuable thing. I challenge you to spend a little time rereading your earlier blog entries and talking specifically about this, not in self-blame or exculpation, but in addressing what personal or professional biases would have led to your conclusions, and what that would mean for you in the future.

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Unfortunately the American taxpayer will end up footing a large chunk of the real estate bust, look at the Japanee market for an example.