'Midsummer meltdown': How did we get here?

In a new report out late last week, the Center for Economic and Policy Research investigates factors that led up to the recent instability in financial markets, including the housing bubble and recent run-up in stock prices.

The report examines the unprecedented rise in home prices over the last decade, and its similarities to the stock bubble of the late '90s. Dean Baker, co-director at the Center and author of the  research, asks: "What are the fundamentals?" and "Why is it hard to see a bubble?"

The housing bubble is a familiar subject to Baker, who was writing about the existence of a price bubble in 2002. (See Inman News story.)

In his recent research, Baker notes that economists and analysts who are often quoted by the media also are often caught up in the psychology of financial bubbles.

"The housing bubble was recognizable, but as was the case with the stock bubble, those who focused their analysis on fundamentals were largely ignored in the media and in policy circles" says Baker.

The fundamentals in both the stock and housing market showed that both markets were seriously over-valued, according to Baker, yet this fact was rarely noted by economists or reported by the media.

The report, "Midsummer Meltdown: Prospects for the Stock and Housing Markets," is worth a read and available for download online.

Baker also writes about financial markets and other policy issues at TPM Cafe Blog.

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