Wednesday, March 19, 2008

Unbelievable

Wall Street Journal has a long article about how the U.S. housing bust fuel a "blame game". Yet despite being so long, the article conspicuously fails to mention the by far most important reason-namely the Fed's low interest rate policies during that era.

Trying to shift attention to other factors really miss the point that the whole purpose of the low interest rate policy was to encourage increased borrowing. During that era the Fed actively tried to increase credit- and money supply growth as much as they could, and saying that there for example should have been more regulation to prevent "predatory" lending misses the point that this "predatory lending" in fact had the same effect as the low interest rate policies of the Fed and thus was as much of a tool to achieve the goal of the Fed at the time (i.e. to make the recession milder and then to prevent the alleged "threat" of deflation). Had such legislation existed and had it been effective,then the Fed given their goals would have had to keep interest rates even lower for an even longer period of time and that would have meant at least as much damage as what actually happened.

1 Comments:

Anonymous Justin Rietz said...

It just kills me that the WSJ has this sort of drivel, yet someone like Robert Reich firmly backs the position that the Fed is to blame. But reading Reich's blog means I have to stomach his semi-socialist rants.

Though whole Fed vs. regulation argument reminds me of communist Eastern Europe (and other authoritarian regimes). There were plenty of regulations against corruption, but the only people who did well in the system were those who were corrupt. It's a matter of incentives.

11:31 PM  

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