Dean Baker seems to suggest that the real economic problem is the decline in housing prices not the credit crisis. However, as Free Exchange points out the housing bubble was the symptom of a credit bubble and the popping of the latter lead to the popping of the first.

You take away structured finance and the subprime market, and the fire runs out of fuel much more quickly. Think about this—the big leap in subprime mortgage originations took place between 2003 and 2004. At the end of 2003, the Case-Shiller 20-City Composite Index stood at 150—50% above its level in 2000. It would subsequently peak at around 206. That additional doubling was largely due to the expansion in the number of prospective homebuyers, and it turned a bad bubble into an historically awful one.

I would go even further and suggest that the reason bubble began was the proliferation of Alt-A mortgages that were at least as intimately connected with the rise in housing prices as subprime. Both changes gave borrowers significantly more purchasing power and with all due respect to Ed Leamer did in fact change the technology by which land was transformed into housing.

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