So research economist Paul Willen has, after much research, concluded that no one could possibly have seen the housing bubble coming:
Willen has spent the past four years trying to persuade people of what he sees in the data: that everyone in the drama acted perfectly rationally. Under the assumption that the real estate market would continue its steady rise, it made sense for families to buy homes they couldn’t afford, and it made sense for bankers to buy up subprime mortgages. This belief —Willen thinks of it as a mass delusion—fueled an immense bubble that could not be reliably identified for what it was.
If he’s right, then the finger-pointing that’s occurred since the crash—the belief that the various actors should have understood that housing was overvalued, that credit was being extended too freely, that somehow the Fed could have cooled it down—is beside the point. Rather, Willen argues, we should humbly come to terms with the frightening fact that when economic delusions take hold, none of us may be able to tell that we’re being swept up in them.
Seriously, are you shitting me? Plenty of people knew it was a bubble. Hell, my mother, a retired school teacher, saw the crash coming. Around 2005-06, I went back to northeastern NC to visit my family, and while we were driving around rural Camden County, she shook her head at all the subdivisions popping up. They were funded by the kind of subprime mortgages that would later become infamous.
"In a few years, they won't be able to pay their mortgages, most of this will go belly up, and a lot of it will be abandoned."
And that's pretty much what happened.
Willen has a (small) point about how fallible the art of prediction can be, but I don't think it quite backs up the "who knows?" conclusion he comes to.
Intelligence and training, while certainly invaluable, don't guarantee wisdom. The crash proved (again) that the brilliantly educated can often just come up with more elaborate justifications for really bad ideas, such as the belief that housing prices will grow indefinitely.
Likewise, many economists were enmeshed in a business system that was making quite a bit of money off of those assumptions, so the aforementioned bright people had considerable incentive to find more of those elaborately terrible justifications. It's not that people couldn't see the bubble coming, just that a lot of economists didn't and no doubt some of those who could wouldn't.
Peer pressure works just as well on economists as any other human population, after all, and their considerable training provides plenty of ways to cherry-pick evidence to fool first themselves, and then everybody else.
Every profession or subculture emphasizes certain traits over others, creating a worldview, and attendant blind spots. What plenty of economists missed, no shortage of people at the ground level saw as completely obvious — this can't keep going up forever — it's entirely possible to be bright enough to be truly stupid.
And it's about damn time we asked if having such a limited swath of perspectives at the helm isn't one reason we're in this mess today.