False Profits: Recovering from the Bubble Economy [Paperback]

Dean Baker (Author)

Book Description

Publication Date: January 15, 2010

Despite reports that the recession may be over, the unemployment rate is more than ten percent and home foreclosures are at a record high. It’s no secret that the U.S. economy is in shambles because of the recent housing bubble. However, according to Dean Baker, Co-Director of the Center for Economic and Policy Research, the people who looked the other way as the eight trillion dollar housing bubble grew unchecked are trying to rewrite history by downplaying the impact of the bubble. In Baker’s new book, False Profits: Recovering from the Bubble Economy, he recounts the strategies used by the country’s top economic policymakers to keep the American public unaware of their failure to recognize the housing bubble and to take steps to rein it in before it grew to unprecedented levels, resulting in the loss of millions of jobs, homes, and the life savings for tens of millions of people.

 

Editorial Reviews

Review

 

TruthOut.com, Book Review by Leslie Thatcher, 2/10/10

The delicious double-entendre of Dean Baker's most recent title is enhanced by the book's cover photo of a trio of false prophets, Ben Bernanke, Alan Greenspan and Henry (Hank) Paulson, all of whom are thoroughly excoriated within the book's pages for their responsibility in feeding, prolonging, misdiagnosing and incorrectly responding to the 2007-2009 financial meltdown and the associated economic collapse. However, the book also chronicles the loss of $8 trillion of housing "wealth," $1.4 trillion in annual demand, whatever financial security the vast majority of baby-boomers ever had, "increases" in homeownership rates and any other widespread economic gains associated to the post-2000 period. Truthout has published Dean Baker's columns about net ob losses for 2000 - 2010, a decade that also saw a 26 percent drop in the stock market, the elimination of the $236 billion federal budget surplus President Bush inherited and its transformation into a record deficit and the overall deliquescence of any societal and most people's personal economic "profits."

While most of us find ourselves economically worse off after the last ten years, some have done extremely well and most of those who bear the burden of responsibility for the American economic catastrophe have suffered no consequences whatsoever: financial, social or professional. Writing about Bernanke specifically, Baker's remarks are equally apposite to other titans of finance, central banking and the financial regulatory regimes:

It would difficult to imagine someone with a comparable record of disastrous failures being allowed to remain in most jobs. Would a nurse who routinely administers the wrong medicine and causes his patients to die be allowed to keep his job? Would a bank teller who leaves the cash drawer open remain in her position? How about the school bus driver who comes drunk to work?

In most lines of work, a certain level of competence is expected. Unfortunately, this is not the case for those who set US economic policy. [1]

Baker places the burden of blame on regulators and the political establishment because they utterly perverted their mission:

Progressives do conservatives' bidding when we denounce them as "market fundamentalists." We should, instead, be exposing their use of government to set up structures that ensure the market works to benefit the wealthy. We could then bring our policies into focus as those designed to ensure that market outcomes will benefit the bulk of the population.

The market is just a tool, like a wheel or a hammer. It would be bad politics and bad policy for progressives to make a big scene attacking the wheel. It is similarly bad politics and bad policy to put these attacks on the market at the center of a political agenda. [2]

Baker never attacks the wheel; instead he demonstrates how it was deliberately allowed to run wild. As Baker himself warned as early as summer 2002, all indicators pointed to the rise in housing prices as a classic bubble, divorced from any tether in reality, yet the regulators, media and most mainstream economists kept pumping hot air into that bubble. Further, Dean Baker exposes the pathetic excuses that the regulators did not have the necessary tools to put on the brakes for the self-serving and specious rationalizations they are. [3] Ever debunking the myth that somehow it was the "free" market at work, he relentlessly exposes how regulation, regulatory bodies and the public officials charged with supervising the financial industry have used their power to favor a narrow swathe of private interests over the public good. And, as always, Baker highlights what alternatives were and are available to turn that equation around. Baker's relentless exposé of what is actually subsidized and who profits from specific policies, how wealth is transferred and how all this activity is disguised fuels his narrative with "true prophet" power.

"False Profits" combines impeccable scholarship - assembling an array of relevant facts and data totally accessible to non-economists - with Baker's acerbic, but unforced, wit and verve. His iconoclasm constantly renews its sources and consistently targets those "false prophets" in all sectors who contribute to misleading the American people. Baker is the journalists' economist, the reality-based economist: whatever other case he may be making, he invariably demonstrates why correct and timely information and clear understanding are essential to economic problem-solving, as well as how "fudges" harm everyone.

The book's structure begins by a backward look, an analysis of precisely how we reached the present situation and what our present situation actually is (in chapters, "Economic Collapse: It Is Their Fault," "Surveying the Damage" and "The Terrible Tale of the TARP"), then pivots on an exposition of why correct diagnosis and analysis are so crucial ("Will They Ever Discover the Housing Bubble?"), develops the case he has presented with three chapters of prescription ("Stimulus: It Is Just Spending," "Real Stimulus: Programs to Boost the Economy" and "Reforming the Financial System") and concludes with a resounding final call for accountability ("Remember the Housing Bubble").

Unfortunately, recent events - the absence of any effective policy to slow down foreclosures; the most probably ineffective and unquestionably inadequate stimulus measures in the just-presented budget; financial services regulatory proposals that do not address the causes for regulatory failure - suggest that the present administration is only slightly more willing to learn from Dean Baker's acute analyses than was its predecessor. And Ben Bernanke's reconfirmation as Fed chairman is just the most recent and flagrant sign that the administration has no intention of investigating, let alone punishing, the regulatory - and individual regulators' - blunders that led to the present pass.

Economics is a science of human behavior. It rests on the observation that people respond to incentives. Consequently, Baker's apparently political argument that there must be consequences for the failures of judgment and action that resulted in the economic meltdown is a quintessentially economic one. With no disincentives for failure and the ever-present incentives for complicity offered by the industry that has captured them, regulators will continue to fail the whipping boy who pays for their transgressions - us.

About the Author

Dean Baker is the co-director of the Center for Economic Policy and Research in Washington DC. He is author of several books, including Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPoint), The United States Since 1980 (Cambridge University Press), The Conservative Nanny State (Lulu), and Social Security: The Phony Crisis (with Mark Weisbrot; University of Chicago Press). A columnist for the Guardian, The American Prospect, and Truthout.org, Baker writes regularly for the Washington Post, The Atlantic, and the Financial Times, and appears frequently on National Public Radio, CNN, CNBC, and PBS’s NewsHour. He received his B.A. from Swarthmore College and his Ph.D.in economics from the University of Michigan.

Product Details

• Paperback: 174 pages
• Publisher: Berrett-Koehler Publishers (January 15, 2010)
• Language: English
• ISBN-10: 0982417128
• ISBN-13: 978-0982417126
• Product Dimensions: 8.4 x 5.4 x 0.7 inches
• Shipping Weight: 10.4 ounces (View shipping rates and policies)
• Average Customer Review: 3.7 out of 5 stars  See all reviews (9 customer reviews)
• Amazon Best Sellers Rank: #420,003 in Books (See Top 100 in Books)

More About the Author

Dean Baker has written extensively on the bubble economy over the last decade and was one of the first economists to recognize the stock and housing bubbles and explicitly warn of the risk of their collapse. Previously a senior economist at the Economic Policy Institute and a consultant to the Joint Economic Committee of the U.S. Congress. Baker now co-directs the Center for Economic and Policy Research in Washington, DC. His blog at American Prospect, 'Beat the Press,' features commentary on economic reporting. In addition to Plunder and Blunder: The Rise and Fall of the Bubble Economy (PoliPointPress, 2008), he has written The United States Since 1980 (Cambridge University Press, 2007) and The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (Center for Economic and Policy Research, 2006). His columns have appeared in the Atlantic Monthly, the Washington Post, the Financial Times, the Guardian, American Prospect, and Truthout. He received his Ph.D. in economics from the University of Michigan.

Customer Reviews

Most Helpful Customer Reviews

17 of 19 people found the following review helpful:

4.0 out of 5 stars Understanding, June 7, 2010

By 

A US Veteran (United States) - See all my reviews

Amazon Verified Purchase

This review is from: False Profits: Recovering from the Bubble Economy (Paperback)

I lost my job, modest home, and life's savings and now my family is split because of needing to find work out of state. Two jobs, working weekends, no vacations for what?

I had paid over 200k in interest payments to the banks and wanted to understand what the hell happened to the economy. This book did a great job of clarifying the causes of disaster. The housing bubble began in 1995 and will continue to decline.

A generation of people have been financially wiped out. If you are one of those, this book does a great job of explaining it. It helps to read it with a cocktail.

51 of 65 people found the following review helpful:

4.0 out of 5 stars Yes.Speculation is the problem.No.Keynes never supported deficit finance, January 13, 2010

By 

Michael Emmett Brady "mandmbrady" (Bellflower, California ,United States) - See all my reviews
(VINE VOICE)    (REAL NAME)   

This review is from: False Profits: Recovering from the Bubble Economy (Paperback)

The author correctly points out that banker financed loans to speculators in the stock,money,and real estate markets were the main cause of the Great Recession.He correctly proposes,as Keynes did in the General Theory (GT;1936) in chapter 12, to tax stock market transactions and shows how England's miniscule 1/2 of 1 % tax brings in the equivalent of $40 billion a year.He correctly demonstrates that Greenspan,Bernanke,Paulsen,Geither,etc.,blundered again and again and again,ad nauseam ,in their policy proposals, recommendations and analysis.However,he fails to explain why they continually blundered .All of these individuals were ,and still are, believers in the Efficient Market Hypothesis(EMH).The EMH was the foundation for the VAR (Value At Risk )models that were supposed to safely allow for the complete and total deregulation of all money,financial ,and stock markets as the banking and finance industries substituted managed risk assessments using VAR in place of financial regulation.Both VAR and EMH are based on the false claim that the time series data in financial and stock markets is normally(log normally)distributed.Mandelbrot demonstrated in 1963 that the time series data followed the Cauchy distribution .He showed that the data was not even remotely normally distributed.Mandelbrot's demonstration means that financial market risk is greatly underestimated by the EMH and VAR models,as well as by the Capital Asset Pricing Model (CAPM),which all use some kind of normal distribution .The banking industry continues to use these models even after their complete failure.

I have deducted one star because the author has erroneously claimed that Keynes was in favor of deficit financing (pp.106-107,119-120).Keynes was opposed to any type of budget deficit aimed at promoting increased short run consumption spending as put forth by both the Bush and Obama administrations.Keynes favored " loan expenditure".Loan expenditure involved having the British Government stop adding to the sinking fund set aside to pay down the national debt and spend the funds on long run infrastructure investment projects.This would require two different budgets-a current account ,which would always have to be balanced, and a capital account which would fund public works projects that would end up paying for themselves over the long run.Only the capital account could run a deficit.Obama's stimulus package was just the kind of short run,pork barrel,consumption approach that Keynes opposed.Obama could have put the entire $780 billion into ,for example, long run transportation projects that would have really ended up creating jobs and improving to some moderate degree the current,slowly collapsing transportation system that in fact needs roughly $12 trillion to effectively modernize.
The author fails to come to grips with the fact that Obama is,and has been, allied with the big Wall Street hedge funds,private equity firms,and commercial banks ,whose speculative behavior has brought down the American economy,all his life.Obama is perhaps the ultimate false prophet.

9 of 11 people found the following review helpful:

5.0 out of 5 stars Brilliant study of the crisis, July 20, 2010

By 

William Podmore (London United Kingdom) - See all my reviews
(REAL NAME)   

This review is from: False Profits: Recovering from the Bubble Economy (Paperback)

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, has written a brilliant little book on the cause of the US economic crisis. He contends that it is not a financial crisis or a credit crunch, but that the crisis' `fundamental cause [is] the huge overvaluation of the country's housing stock'.

From 1895 to 1995 house prices rose at the same rate as the prices of other goods. By 2002, they outpaced the overall rate of inflation by 30 per cent, although nothing had changed on the market's supply or demand side. From 1996 to 2006, house prices rose by more than 80 per cent.

The US Federal Reserve Bank (whose Board the banks control, by appointing their own regulators) fostered the growth of this $8 trillion housing bubble, after the $10 trillion stock bubble popped. $8 trillion of wealth, $110,000 per homeowner, vanished.

Baker writes, "The core problem is that the economy developed serious imbalances as a result of the growth of the housing bubble. In the short term, the only way to offset the loss of demand caused by the collapse of the housing bubble is through massive deficit spending. In the longer term, a reduction in the value of the dollar will be necessary to restore more balance to our US trade. However, the political elites, led by the managers of the financial industry, do not want to allow for a discussion that results in a policy prescription of large deficits and a lower valued dollar. Such policies would go directly against their financial interests and indirectly indict the policy agenda they have promoted for more than a decade."

The US Treasury lent banks $700 billion, with no conditions, like cutting bonuses, dividends or evictions. The Fed lent the banks another $1.6 trillion; the Federal Deposit Insurance Corporation lent another $350 billion, and the Fed another $150 billion through the bankrupt insurer AIG (including $13 billion to Goldman Sachs).

Obama let AIG executives get $165 million in bonuses: their contracts were sacred. Yet he told General Motors and Chrysler workers to give up health benefits they had worked 30 years for, and which they were guaranteed under union contracts.

Obama's $800 billion stimulus package, although a step in the right direction, was far too small, when the shortfall was $1.3 trillion. GDP must rise by 2 per cent to cut unemployment by 1 per cent.

Baker exposes Wall Street's scare stories about inflation and debt. He notes, "The well-being of future generations will depend on the health of the economy and the society that we pass on to them. If we maintain and improve the physical capital stock, ensure that our children get a good education, and act to protect the environment, they will be prosperous even if the United States has a large public debt. This country's period of greatest prosperity was in the three decades following World War II, when the ratio of debt to GDP began at 120 percent. Such a ratio translates into a national debt of $18 trillion given the size of the economy in 2009." Total US debt now is less than $11 trillion.

10 per cent unemployment equals a 20 per cent loss of GDP. He points out, "The country having to endure long periods of high unemployment is wholly unnecessary for the simple reason that we know how to prevent it. Ever since Keynes, we understood that high unemployment, as occurred in the Great Depression or what we are experiencing in the housing crash recession, is caused by a lack of demand in the economy. The way to address high unemployment is to create demand. In other words, the answer was and still is to throw money at the problem. ... Nothing is more harmful to the economy presenting a downturn than government spending cuts and tax increases that amplify the downturn's impact."

He argues that the USA needs more funding for national and local government programmes, universal health coverage, publicly-funded clinical drug trials, subsidies for public transport, support for creative and artistic work to be made freely available on the Internet, and funds for developing open source software. He proposes giving employers a tax credit to give their workers paid time off (tens of millions of US workers get no paid time off at all, no paid holiday, no paid family leave or paid sick days). Firms could cut working hours, without cutting pay.