A Decision Done Right?
By The Mysterious Flying Miser -
The other day, I was reading through a few of today’s big ideas for solving the housing crisis, and I started to wonder whether or not there were any good solutions being proposed by the Federal Reserve Bank. It crossed my mind that a few of these wise guys might be able to offer some insight into what caused this mess. I’ve always found it easier to solve a problem when I know what caused it. So I take a look at their website thingie, and this is what I find. It turns out these guys had nothing to do with it. Really!:
From Productivity Swings and Housing Prices, by James A. Kahn, Federal Reserve Bank of New York, July 2009:
“The housing boom and bust of the last decade, often attributed to ‘bubbles’ and credit market irregularities, may owe much to shifts in economic fundamentals. A resurgence in productivity that began in the mid-1990s contributed to a sense of optimism about future income that likely encouraged many consumers to pay high prices for housing. The optimism continued until 2007, when accumulating evidence of a slowdown in productivity helped dash expectations of further income growth and stifle the boom in residential real estate.”
Remember this one from Alan Greenspan, Former Federal Reserve Chairman, in 2007?
“Mr. Greenspan, who calls himself a ‘lifelong libertarian Republican,’ writes that he advised the White House to veto some bills to curb ‘out-of-control’ spending while the Republicans controlled Congress. He says President Bush’s failure to do so ‘was a major mistake.’ Republicans in Congress, he writes, ‘swapped principle for power. They ended up with neither. They deserved to lose.’”
“‘We wanted to shut down the possibility of corrosive deflation,’ he writes. …‘It was a decision done right.’”
“He attributes the housing boom to the end of communism, which he says unleashed hundreds of millions of workers on global markets, putting downward pressure on wages and prices, and thus on long-term interest rates. Mr. Greenspan returns repeatedly to the far-reaching importance of communism’s collapse. He says it discredited central planning throughout the world and inspired China and later India to throw off socialist policies.”
From Monetary Policy and the House Price Boom across U.S. States, by Marco Del Negro and Christopher Otrok, Federal Reserve Bank of Atlanta, October 2005:
“We use a dynamic factor model estimated via Bayesian methods to disentangle the relative importance of the common component in OFHEO house price movements from state- or region-specific shocks. Our sample consists of quarterly data from 1986 to 2004. We find that historically fluctuations in house prices have mainly been driven by the local (stateor region-specific) component. Indeed, growth rates in OFHEO house price index are less synchronized across states than are the growth rates in real per capita income, which are a measure of the business cycle at the state level. In the recent (2001-2004) period, however, ‘local bubbles’ have been important in some states, but that overall the increase in house prices is a national phenomenon. We then use a VAR to investigate the extent to which expansionary monetary policy is responsible for the common component in house price movements. We find the impact of policy shocks on house prices to be small relative to the size of the recent housing price increase.”
