19 Nov 2008

The Housing Bubble: Greenspan or Asian Savers?

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In today’s Mises.org article, I take on Henderson and Hummel’s recent Cato piece that said it was a foreign savings glut, not Fed policy, that caused the housing bubble.* The conclusion:

David Henderson and Jeffrey Rogers Hummel have tried to exonerate Greenspan from his alleged role in the housing bubble. However, to do so they must rely on novel transformations of the conventional monetary measures, in order to demonstrate “tight” Fed policy, when all of the conventional indicators show a very “loose” policy precisely when the boom was at its greatest. Furthermore, Henderson and Hummel offer an alternative thesis—a global savings glut—that hardly fits the most basic of facts. Global savings rates were lower for most of the housing boom than in the preceding decade, and global savings rates are higher now (amidst the bust) than they were during the boom that they allegedly fueled.

Putting aside the details, we can also step back and ask ourselves, does it really make sense that one of the worst financial crises to grip the world was caused because people started saving too much? Or does it make a lot more sense to blame it on huge central-bank injections of phony credit into the markets? How two economists who appreciate the strength of the free market could opt for the former hypothesis—despite the dubious evidence for it—is puzzling indeed.

Naturally, there is more to the story of the housing boom than simply saying, “The Fed chairman did it.” A full explanation would involve the Chinese government, Fannie Mae and Freddie Mac, and the ratings agencies that gave high marks to dubious mortgage-backed securities. But the original Misesian insight has withstood the test: it still seems that the Fed was a necessary condition for the worst speculative bubble in world history.

UPDATE: * One angry emailer took me out to the woodshed and said that H&H never claimed foreign savings were responsible for the housing bubble, but that instead foreign savings were responsible for the low interest rates. I still think everyone (including H&H) agrees that the low interest rates helped the bubble, so it’s a distinction without a difference. I think it is pretty clear though that Hummel himself thinks a foreign savings glut is a necessary component of the explanation, and more relevant than Fed policy; see here. I am waiting to hear back from either of them on the matter; I will of course issue a clarification / retraction at this blog (and on the Mises blog tied to the article) if I have misrepresented their view.

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