This quote from Dean Baker—one of the first economists to notice the housing bubble (about a year-and-a-half after I noticed it, but I digress)—actually comes from two weeks ago. I just found it and I like it, even if it is an exaggeration:
The Fed Is Responsible for 10.2 Percent Unemployment in the Same Way That Al Queda Was Responsible for September 11th
An elaboration:
There may well be an anti-elitist strain to the anger against the Fed and Bernanke, but serious people do not dispute their responsibility for the economic crisis. There was an enormous housing bubble that was easy for competent economists to recognize. It was inevitable that it would collapse and that its collapse would lead to a serious downturn. Bernanke and the Fed allowed the bubble to just continue to expand until it collapsed of its own weight instead of using the powers of the Fed to rein it in before it grew to dangerous levels. All of this is entirely clear to those who know the history.
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It's true that Greenspan held rates too low too long was the problem. But, it's false that it was the problem.
ReplyDeleteAs mentioned before, Greenspan could also be criticized for raising rates too high too quickly, resulting in widespread ARM resets.
I always thought it odd that Greenspan played the free-money game for most of his career, enjoying the popularity that came with a "robust economy." He was called a "rock star" and given the Presidental Medal of Freedom.
Then, just before he retired he raised interest rates with astonishing frequency. He immediately retired and then began talking about how we faced an economic catastrophe.
However, you have to keep in mind that the Fed's interest rates don't result in mortgage rates. Mortgage rates are tied to Treasury bills, whose rates are set by auction demand.
For example, today Fed rates are near 0%. Yet, mortgage rates actually rose because treasury rates rose due to foreign investors not buying (causing Treasury rates to climb and the Fed to buy Treasuries to backfill for the loss of demand).
So, we could say that investors in the dollar were just as guilty of holding interest rates low.
That's really the problem with trying to act like the Fed Reserve exists in a vacuum. The global market was buying our treasuries despite the lending imbalance.
Additionally, the common belief among economists was that bubbles can't happen. "The market gets it right." When the bubble was well underway, economists simply said it wasn't a bubble because their models didn't allow for bubbles.
For a lengthy examination of that problem, see the NY Times, How Did Economists Get it So Wrong?. (Note: To page forward, you must use this URL: "http://www.google.com/url?q=http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=2". Just change "pagewanted" to any number between 1 and 8).
That's basically the result of 20 years of deregulatory politics which gave us the much larger bubble contributor: an opaque, over-the-counter derivatives market (CDS, CDO, etc.).
It definitely was a problem that a free-market ideologue like Greenspan was put into the Fed. His experiment didn't work very well. The problem today is that free-market ideologues try to say it was the regulatory power of the Fed that was the problem (despite the fact that Greenspan exercised precious little of that power).