I know a lot of you wonder why I am always so quick to volunteer the fact that I made erroneous warnings about official price measures thus far, but the reason is that I can’t stand analysts who make all kinds of predictions, and then only pat themselves on the back for the ones they got right. I also think it encourages a sincere debate on the merits, when both sides drop the BS and admit their respective strengths and weaknesses.
We know that 6.5% NGDP growth would not, ceteris paribus, produce a housing bubble. Indeed most other economic expansions saw faster NGDP growth, without a housing bubble. So the [Austrian-type] argument [that the Fed caused a distortion that didn’t show up in excessive NGDP growth] rests on the proposition that the lower interest rates resulting from easy money produced the housing boom. That’s possible, but the difference in the level of longer term real interest rates between an expected 5% and 6.5% NGDP growth is likely to be very small, regardless of what the Fed buys. So I simply don’t see how it comes close to explaining the housing boom. The current price of homes is closely linked to what people think homes will be worth in 5 or 10 years. And I don’t see how a year or two of easy money right now would have much effect on the expected value of homes 5 or 10 years out, unless it led to expectations of very fast NGDP growth. But it didn’t. Of course the weakness of my argument is that I have no rational explanation for the housing bubble. I’ve discussed bad regulation and tighter zoning and rapid Hispanic immigration to the 4 subprime states, but I don’t really think those explanations are adequate. It’s a mystery to me. Had real housing prices been strongly affected by monetary policy in other periods of US history I’d been very sympathetic to this argument.
I do understand why commenters who are closer to the Austrian tradition don’t find my analysis persuasive. I don’t have an explanation for the bubble and they think they do. That’s an advantage to the other side. But until I’m convinced that it’s a general theory that can explain other money–bubble linkages in other periods of history, I’m not willing to sign on.
(For example, in the 1920s real interest rates were not low and NGDP growth was not high. And yet we still had a big stock “bubble” followed by a severe slump.) [Bold added.]
So in the interest of chivalry, let me return the favor and say that looking just at consumer prices since 2008, Scott is looking better right now than I am. That doesn’t mean I’m agreeing with his theory, just as he isn’t agreeing with the Austrians about the housing bubble. Rather, it just means we can both recognize how we must sound to disinterested 3rd parties who are trying to figure out which of us is right.
Here are some additional points on the above excerpt from Scott:
==> I think Selgin was wrong to frame the issue as the difference between 5% and 6.5% NGDP growth. I (as well as many Austrians) completely reject Scott’s approach of using NGDP as the metric for Fed policy. So Scott is wrong (you can see more of what I mean if you click on the full post) to think this is just an issue of NGDP growing 5% versus 6.5%. That’s the whole point of what we’re driving at here: NGDP growth is not a good measure of whether the Fed is “screwing things up.” Scott is asking, effectively, “Oh come on, it wouldn’t matter what the Fed added to its balance sheet in those years, to generate an extra 1.5% of NGDP growth per year. How can you blame the global financial crisis on that?!” Right, and if someone used my body weight as a gauge of Fed policy during the 2000s, we might come to a similar conclusion. Sure, it grew too quickly, but not enough to explain the housing bubble, for crying out loud! So clearly, I am justified in thinking my body weight is the appropriate metric with which to evaluate Fed policy.
==> In my articles at Mises.org (here’s a later one, and follow its links) I gave a decent empirical case for why Greenspan either caused or at least greatly exacerbated the housing bubble. In particular, I showed that monetary base growth was comparable to large stretches of the 1970s–when most economists now agree the Fed was “too loose”–and I showed that Greenspan’s cuts in the fed funds rate corresponded nicely with movements in the 30-year mortgage (though not as much, of course). Then I showed that given the sharp drop in mortgage rates, the rise in the Case-Schiller home price index was pretty “rational” in the early stages of the boom, meaning that if a home buyer had a certain monthly payment in mind, then “how much house” he could buy was explained largely by the drop in mortgage rates.
==> Note the parenthetical claim at the end of the above excerpt. This is the second time I’ve seen Scott do this in the last few weeks. In another post, responding to White (who had warned that moving from the current NGDP trajectory to 5% growth would involve a burst of monetary expansion that would “do more harm than good,” Scott wrote this:
I don’t know of any theoretical models where steady 5% NGDP growth would create bubbles. And even if bubbles did occur, I can’t imagine why they would represent a public policy problem if NGDP continued to grow at 5%. I’d also point out that the US has experienced 3 major equity or residential real estate bubbles in periods of relatively low inflation and NGDP growth (1929, 2000, 2006) and zero major bubbles in periods with high inflation and NGDP growth (1968-81). The 1987 stock market bubble was an intermediate case (which did zero harm, as NGDP continued growing after the bubble.) [Bold added.]
Do you see what’s odd about Scott’s response? As usual, you would need to click through to see Larry White’s original post to understand the full context, but he too (like Selgin) was arguing that from an Austrian perspective, simply looking at NGDP growth could mask the dangerous changes to the capital structure resulting from Fed monetary expansion. So then, in order to tell Larry he was on weak ground, Scott comes back and says that before the two worst calamities in modern economic history (1929 and 2006), we had asset bubbles that didn’t show up as dangerous according to Scott’s preferred metric, and that when Scott’s preferred metric was flashing warning signs, we didn’t get any big bubbles.
To be fair, I totally understand what Scott is doing in the above quotation. It’s just weird that Larry could have lifted that sentence verbatim and used it to underscore his whole critique of NGDP targeting, yet Scott thinks he is helping his own case with these observations.