Everybody is linking to Dean Baker, who argues that the housing collapse, and not the credit crunch, is responsible for the current recession:

Having dismally failed in their jobs to inform the public, reporters are still relying almost exclusively on sources that completely missed the housing bubble. As a result, they are still badly misinforming the public, first and foremost by attributing the economic downturn to a credit crunch.

This is truly incredible. Homeowners have lost more than $5 trillion in housing wealth. There is a very well established wealth effect whereby $1 of housing wealth is estimated as leading to 5 to 6 cents of annual consumption. This implies that the loss of wealth to date would cause consumption to fall by $250 billion to $300 billion annually (1.7 percent to 2.0 percent of GDP). If you add in the loss of around $6 trillion in stock wealth, with an estimated wealth effect of 3-4 cents on the dollar, then you get an additional decline of $180 billion to $240 billion in annual consumption (1.2 percent to 1.6 percent of GDP).

These are huge falls in consumption that would lead to a very serious recession, like the one we are seeing.

This is kind of a silly argument. The credit crunch is a direct result of the housing collapse, so of course the housing collapse is the “real” cause. (And since the credit crunch contributed to the collapse in share prices, housing is the ultimate cause of the wealth loss there, too). I don’t know why Dean thinks it’s important to argue that housing is mainly causing recession via the wealth effect on consumption. It seems like a minor point, and it’s not completely true in any case.

Consider, for instance, that between the onset of the housing downturn in mid-2006 to the end of 2007, home prices nationally fell 10%. That’s a lot of wealth loss–roughly $2.5 trillion according to Dean’s math. But while economic growth was a big concern back at the end of 2007, the economy didn’t actually fall off a cliff until late summer of this year (yes, growth was negative in Q4 2007, but that was mainly due to a one-off reduction in inventories). Household consumption was a positive contributor to GDP, right up until the last quarter. Surely that says something about the action of the wealth effect, no?

A couple of other points seem relevant, as well. Consumer confidence had held fairly steady for most of 2008 before falling off a cliff in October. To the extent that consumers are spending less because they’re gloomy, the daily drumbeat of financial market badness seems to have played a big role in creating that gloom. Exports also contributed much less to growth in the third quarter than they had in the second quarter, suggesting that the international fallout of the financial crisis has depressed recent output growth. In short, one doesn’t have to hunt to find ways in which the credit meltdown has influenced the path of economic output. Saying it’s all about lost housing wealth misses a great deal of the story.