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Binyamin Appelbaum and David Cho have a nice story in the Washington Post today about the Fed’s lackadaisical regulation of banks in the decade before the housing bust.  It’s worth a read.  As a native Southern Californian, though, this passage jumped out at me:

In January 2005, National City’s chief economist had delivered a prescient warning to the Fed’s board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.

The message wasn’t well received. One board member expressed particular skepticism — Ben Bernanke.

“Where do you think it will be the worst?” Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists.

“I would have to say California,” said the economist, Richard Dekaser.

“They have been saying that about California since I bought my first house in 1979,” Bernanke replied.

I suppose that’s true.  But here’s the thing: “they” were right.  California went through a housing bubble in the 1980s that burst in 1990.  I should know: I bought a house in 1989 and lost $40,000 on it before finally caving in and selling it four years later.  In all, it took nearly a decade for housing to regain its pre-bubble value — at which point, a brand new bubble was heating up.

It was myopic enough to believe in 2005 that housing wasn’t overpriced on a nationwide basis.  But to specifically dismiss concerns about California even though it had been in the trough of a housing crash a mere 10 years earlier? That’s just willful blindness.

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