15 Dec 2008

Evidence That the Fed Caused the Housing Boom

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At mises.org today, I have an article taking on some of the empirical arguments that try to exonerate Greenspan. I take on Megan McArdle, Henderson and Hummel, Brad DeLong, and Casey Mulligan. (In short, I do my best to alienate as many groups as possible from Austrian economics.) An excerpt:

I realize that these disputes may just further convince some readers that economics is not a science but rather an ideological contest in which each side throws its own set of lying statistics at the other. But even so, I will now use the same underlying data as the writers above, to reach the opposite conclusion: Greenspan allowed the monetary base to grow quite rapidly precisely when the housing boom shifted into high gear, and precisely when interest rates collapsed.

Before proceeding, I want to remind readers that my story is the textbook explanation of how the Fed operates. It is the writers above who are downplaying the Fed’s ability to push down interest rates or to “stimulate” (however temporarily and artificially) the economy. During the boom years, Greenspan and his fans wanted to take credit for his “merciful” low rates which allowed the United States to avoid a painful recession, but now Greenspan and his defenders want to claim that he was an innocent bystander in the face of Asian thrift and shortsighted bankers. In any event, on to the data, this time presented by the “prosecution” as it were.

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