Evidence
that the Fed Caused the Housing Boom
by
Bob Murphy
by Bob Murphy
DIGG THIS
 In
this forum I have argued that Alan Greenspan's low-interest-rate
policy after the dot-com bust and 9/11 attacks sowed the seeds for
our current recession
and the housing bubble.
I have also criticized the alternate
theory that a foreign "savings glut" was the true
culprit, rather than the Fed. In the present article, I want to
deal with a few empirical objections to the case against Greenspan.
That is, several different economic analysts are familiar with the
theory that "the Fed did it," and they claim that the
facts just don't add up. In the space below, I hope to demonstrate
that the evidence against Greenspan is indeed damning.
Greenspan's
"Smallish" Injection?
One argument
advanced in the attempted exoneration of Greenspan is that he didn't
really pump that much money into the credit markets. For example,
popular blogger Megan McArdle writes,
Both right
wing Austrians and many liberals have a common theory of how all
this happened: Alan Greenspan dunnit. The mechanisms by which
he accomplished his foul task are different in the two cases,
of course. Austrians, and many other free-market types, believe
that by lowering short-term interest rates after 9/11, Alan Greenspan
made the housing bubble, and its eventual bust, inevitable…
Here's the problem: if markets are so great, how come the entire
system can be brought low by a smallish injection of short-term
capital? (emphasis added)
Brad DeLong
makes a similar claim in his critique
of Larry White, whom DeLong praises as the "best of the
Austrians." (DeLong does not tell us who the best-looking Austrian
is, though I hope to at least be nominated.) DeLong writes,
Moreover,
I do not think that Larry White has gotten the part of the story
that he does cover right…. From the start of 2002 to the
start of 2006 the Federal Reserve bought $200 billion in Treasury
bills for cash. This $200 billion reduction in outstanding bonds
and increase in cash surely did lead to an increase in demand
for private bonds. But recall the magnitudes here. We have $2
trillion of losses on $8 trillion in face value of mortgages that
ex post should not have been made. Are we supposed to believe
that $200 billion of open-market purchases by the Fed drives private
agents into making $8 trillion of privately unprofitable loans?
Not likely. I can see how monetary contraction can make previously
profitable loans unprofitable. But I see no way that this amount
of monetary expansion can force private agents to make that amount
of unprofitable loans. The magnitudes just do not match.
Similarly,
David
Henderson and Jeff Hummel write that monetary growth was tamed
during the years of the housing boom, and so Greenspan can't be
the culprit:
A better,
although now unfashionable, way to judge monetary policy is to
look at the monetary measures: MZM, M2, M1, and the monetary base.
Since 2001, the annual year-to-year growth rate of MZM fell from
over 20 percent to nearly 0 percent by 2006. During that same
time, M2 growth fell from over 10 percent to around 2 percent
and M1 growth fell from over 10 percent to negative rates. Admittedly
the Fed's control over the broader monetary aggregates has become
quite attenuated, for reasons elucidated below. But even the year-to-year
annual growth rate of the monetary base since 2001 fell from 10
percent to below 5 percent in 2006 and by June of 2008 was around
1.5 percent, despite Ben S. Bernanke's alleged reflation. When
all of these measures agree, it suggests that monetary policy
was not all that expansionary during 2002 and 2003 under Greenspan,
despite the low interest rates.
Read
the rest of the article
December 17, 2008
Bob
Murphy [send him mail]
runs the blog Free
Advice and is the author of The
Politically Incorrect Guide to Capitalism.
Bob
Murphy Archives
Copyright
© 2008 Ludwig von Mises Institute
|
