Did the Fed Cause the Housing Bubble?
One of the few positive developments from the housing bubble is that many mainstream economists have recognized the pernicious role played by the Federal Reserve. Indeed, some analysts on CNBC have discussed the outright abolition of the Fed. The case against the Fed is straightforward: In an attempt to jumpstart the economy out of recession, Greenspan slashed the federal funds target from 6.5% in January 2001 down to a ridiculous 1% by June 2003.
Ironically, just as many mainstream analysts are seeing the wisdom of the Austrian view, two prominent libertarian economists, Jeffrey Rogers Hummel and David Henderson, have claimed the opposite. FULL ARTICLE
Comments (9)
We should also note that the bubble started popping in late July 2005 when the Philly home building stock index topped out as I noted on LRC during the first week in August of 2005 on LRC. This was at a time when mainstream and mainstreet economists were still denying the existence of the housing bubble. Therefore H&H's monetary evidence runs completely counter to their thesis.
Published: April 14, 2008 9:24 AM
One HUGE piece of the puzzle which is consistently ignored by economists left, right and center is foreign exchange. Where are the dollars? If they are generally held to be valuable by the governments and peoples of other nations in the world then no doubt a good portion of them will remain outside the US. If the dollars start to loose value for those in the rest of the world, then in all likelihood people are going to start trying to spend them and get rid of them as soon as possible (trading them for something useful) - which will increase the velocity of those dollars and thus drive up global prices. In this case you could lay the blame not only on Greenspan but on the central bankers that preceeded him... for the dollars that their monetary expansion created too will be coming back to haunt us, contributing to rising prices around the world.
The final straw that might break the camel's back for the US would be if foreigners (or indeed Americans) stopped buying US government bonds - in this case the Fed would have to start buying these bonds back to keep the yeilds at their target rate.
Why does no one ever talk about forex or bonds?
Published: April 14, 2008 10:41 AM
Well, I think previous pieces have dealt with money held abroad, but I can't recall which in particular.
Published: April 14, 2008 12:25 PM
No one is arguing that there was not a whole lot of money being loaned to the sub prime market; yet where did this money come from? I've not heard anyone argue that the sub prime market was a shift away from more conventional loans or that it came from other shrinking investments; that is, there were no cries that borrowers were being squeezed out as the available money was shrinking (in other areas) so it could be used instead for these sub prime housing loans.
So, if the total amount in loans did not stay constant as the new sub prime loans occurred, then the only remaining conclusion is that the total of loans increased. The sub prime loans would have to be made from new funds. It would seem, given all the history of the FED (in the 70's especially as Murphy writes) and a quick read of Austrian business cycle theory, that there's only one conclusion: The FED created the new money that poured into the sub prime market (and the housing bubble). The facts and figures presented here simply provide more evidence of what seems pretty obvious to anyone who can add and subtract.
Published: April 14, 2008 12:49 PM
Hi Robert,
I would like to supply some data to support your arguments against H&Hs montary aggregates.
The money supply figures that they are incorrect. The true money supply that I have constructed gives a much better picture of M's growth and contraction: http://nimamahdjour.blogspot.com/2008/03/money-supply-watch.html
Needless to say, it is a much better indicator for impending booms and busts as it's annual growth drops below 0 before almost every major recession and remains steadily above 1% or even spikes up to rates of 13% during inflationary booms..
Best regards,
Nima
Published: April 14, 2008 2:26 PM
Mr. Crosswell,
Why does no one ever talk about forex or bonds?
Fear not! That's actually in the queue. It should run in another two weeks or so.
Published: April 14, 2008 3:37 PM
Here is an excellent article that IMO deserves to be mentioned in a seperate blog post:
http://www.bloomberg.com/apps/news?pid=20601039&sid=a1MJS6KbpTbk
A good excerpt:
Published: April 14, 2008 4:53 PM
Fantastic - thanks Robert!
Published: April 14, 2008 5:24 PM
Great article and great topic. Thank your to Mr Murphy.
"Blame Federal Gov't, Not The Fed, For Subprime Mortgage Problems" is the title of the H&H article. That's a nasty way to reinforce the idea that the fed is above politics since it implies it does not belong to Federal government. Why would then the federal reserve get a ".gov" url to use one of the quickest way to prove that the Fed is part of the US federal government?
This H&H article is really fed / government propaganda at work. I find it quite manipulative in that regard.
I have therefore to challenge Robert Murphy's assertion that:" Coming from other writers, one might suspect political motives for such views. Yet H&H are certainly no tools of the powers that be.". I certainly do not know the writers but, from my reading of this piece, H&H are, at least, working to strengthen the mystic around the Fed and the dangerous idea that the Fed is somewhere else, above, like God or something...
The good thing about that article is, however, that if the Fed is not the major culprit, responsibility still lies in government people actions:
(1) Fannie Mae, Freddie Mac and Ginnie Mae who creates moral hazards
(2) The comptroller of the currency
(3) Community Reinvestment Act.
Published: April 16, 2008 4:18 AM