Of Course the Fed Did It
Sebastian Dullen of Europe EconoMonitor may not like Greenspan have a personal interest in denying the role of the Fed, so presumably his denial is based on lack of understanding of sound economics. He advances somewhat different arguments than Greenspan, yet his arguments if anything makes even less sense.
His first argument is a repetition of Fed governor Frederic Mishkin's absurd argument that high interest rates encourages risky investments. The idea, it seems, is that by
making it more expensive to borrow, only risky investments will provide sufficiently high return to make it worthwhile, and so risky investments will increase.
Yet that makes no sense at all. Making it more expensive to borrow will reduce lending growth overall and not shift in any particular direction in terms of low and high risk. The risk in risky investments is a perceived cost for investors, for which they demand compensation. Therefore, they will not consider high risk investments more attractive just because the cost of borrowing is high. The level of risk free interest rates have really nothing to do with this at all. Instead, the effect of higher interest rates will simply be to reduce investments in general, and investment projects with a pay off far into the future in particular. But there is no reason to believe it will cause any shift in investments of different risk levels.
He further argues that the 1983-1986 housing boom is an example of a housing boom under tight monetary conditions. Which is completely misleading. Paul Volcker's monetary tightning was in 1980-82, and the housing boom followed after he implemented dramatic interest rate cuts in 1982. The housing boom followed just after that, with an increase in residential investments of 41.4% in 1983. That year, the MZM measure of money supply rose a full 24.8%, confirming the theory that looser monetary policies creates housing bubbles.
He then argues that the stock market bubble of the late 1920s is another example of a bubble supposedly not caused by the central bank. Which is complete nonsens as the 1920s had a significant monetary expansion, as Murray Rothbard showed in his book America's Great Depression. Dullen argues that real interest rates were high in America in the late 1920s, so monetary policy couldn't be loose. Yet the high real interest rates reflected structural factors related to the positive supply shock to production and profits. The fact remains that real interest rates were lower than they otherwise would have been due to Fed policy.