re: Fed Off the Hook for the Housing Bubble?

Yeah thanks for that.

Ditto.

That's what I like about this board. I might disagree with your opinion, but I sincerely respect it. I understand that this is not a black & white issue, leaving room for interpretation.

I agree, and I've said as much already. 100% to blame? Of course not. Malicious? I'm not wearing tinfoil. But zero blame? frick and no.

Well, even the link you cited said the following:

quote:

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In a nutshell, the paper's authors find that low Fed interest rates could only explain about a fifth of the 53% rise in U.S. real housing prices in the decade to 2006.

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Which even I think is too low an estimate, and really, I don't even think it's possible to assign a certain percent to a variety of different causative factors that happened at different times in response to difference effects.

I think that the Fed knew in 2003 to mid-2004 that housing was getting too "frothy," but that they didn't feel like it was their job to look after particular parts of the whole macroeconomy. I agree with them. I don't think it should be their job to do this sort of thing. I personally don't think the Fed should be in the business of regulating anything, except perhaps occasionally adjusting reserve requirements. To the extent that it is possible (and, yes, I know that in pratice it might not be 100% possible), I think they should be focused purely on monetary policy and disinterested information gathering, and not on implementing regulatory policy.

The Fed is not Fannie Mae's keeper. It is not charged with combatting fraud in the macroeconomy. It doesn't control what happens with Basel accords. It can't overrule Moody's or S&P or Fitch. It can't control what Congress does with lending standards, and it can't tell everybody in the global market that they're wrong to want to invest in something that is really worthless. It's just a central bank.

By mid-2004 to 2006, when they started raising rates, I think the problem was already too big for them to do much about it without causing everything to come crashing down. In 2007 they rode right into the storm and popped the bubble, and then since that time, they've shifted the other direction trying to make sure it doesn't deflate too quickly.

Everybody knows that an extended period of historically super-low interest rates will cause housing prices to rise beyond what they naturally would. That's the way the system is supposed to work. The system is supposed to be able to process that. What happened is that something beyond normal monetary policy aggravated the housing industry. I think these issues, both w/r/t the tax code and regulatory issues, can be traced back to around 1997.

If the industry is rotten, then the rot will of course become most obvious and apparent when put under the strain of low interest rates. But that does't mean the added stress (i.e., low interest rates) is itself to blame.

And just to be clear, I AM in favor of reforming both the regulatory/tax side of the housing industry, as well as the Fed's role in monetary policy. But looking at the two issues, I see one side that is theoretically much easier to solve, and I see another side, the monetary side, which is a theoretical nightmare to try to disentangle from a systemic point of view.

How can we shift our whole economic system away from the artificial manipulation of interest rates in a widespread and very long-term (i.e., since about 1990, and perhaps continuing for another few decades) global deflationary environment? I mean, I'm all in favor of ending FOMC operations in favor of more natural interest rate mechanisms if I thought a workable plan could be implemented. I just don't think we're anywhere close to that yet. And so, we will continue to see (per monetarist theory) swings to low interest rate enviroments in post-recessionary times. And this being the case, I think our energy for creating reform is best spent on non-monetary issues, rather than blaming the Fed for overreacting and thus aggravating an already terrible crisis by making it 20% worse ... or 30% worse ... or whatever percent worse you think it is. The Fed will try to learn and do the best it can setting interest rate policy. Nothing really has to be done to get them to weigh the new information. It's already going to happen. It's the other stuff, from an immediate systemic point of view at least, that needs to be changed.

I'll get off my soapbox for now, but just to be forthright, that's my policy agenda, for anyone who wants to know.

Differences in emphasis...