Analyzing the housing bubble, we can all agree with some basic facts. If you look at the Case-Shiller Index, you would see that a typical home in a major US city was worth 26% less during April 2013 than November 2006. Then, at the end of 2006, the home price bubble popped. Mortgage defaults started to multiply, home prices declined and home demand plunged.
Why did the bubble pop? Here we start to disagree.
In a Kindle mini-book, one blogger says we have “The Three Languages of Politics.” As a result we see the housing crisis in one of three ways. (Yes, I know we are oversimplifying but it works.)
- The progressives are concerned about the oppressed being abused by those with power. As a result, for the housing crisis, they perceive the financial world taking advantage of those with little influence.
- The second group is composed of libertarians who feel that freedom is always challenged by government. Describing a current event, they see coercion challenging freedom. For the housing bubble, they cite foolhardy government policies that supported excessive home buying.
- Conservatives coalesce around the traditional values that form the basis of Western civilization. They feel compelled to defend a civilization challenged by “barbarism.” With housing, when traditional financial institutions are criticized, they see our society’s foundation weakening.
Talking to each other about the housing crisis, we tend to agree with the people who explain the problem like we do. After all, when we define problems similarly, we arrive at similar solutions. If you think the problem was government then you will solve it with less government. By contrast, if you blame an abusive powerful group then your solution will help the powerless.
So, remembering the 3 lenses, all of us might better understand why one person compliments a welfare state and the other supports austerity. You could even think of great economic ideas from Adam Smith, Friedrich von Hayek and John Maynard Keynes. Finally, I wonder if the economic dialogue will be more productive when we know someone’s outlook?
Sources and resources: For a perfect factual timeline of how housing crisis home values changed, this NY Times interactive is excellent. By contrast, for insight about the housing crisis, Arnold Kling’s Kindle mini book, “The Three Languages of Politics,” is a fast thought provoking read and just $1.99.