More Greenspan Loving: Is Everyone On Crazy Pills?!
I am getting increasingly frustrated by some economists’ attempts to deny that the housing bubble had anything to do with the )#$#4 negative real interest rates that Greenspan foisted upon us…during the exact period when housing prices exploded. What is particularly annoying is when these Greenspan defenders say things that are simply not true.
Take Casey Mulligan, whom I really like by the way, over at Cato Unbound. (Incidentally, I am starting to really love their format. They really take advantage of the Internet. Go Wilkinson!) Mulligan is taking Larry White to task for thinking the negative real rates–not seen since the 1970s, mind you, when I assume even Mulligan would admit the Fed messed with the real economy–might have spurred a jump in home prices.
Mulligan goes through some neoclassical analysis of the rational impact of short-term rates on housing prices. OK fair enough; I may come back to that in a future post. But then he says:
Perhaps Professor White would argue that market participants expected short term interest rates to remain low for much longer than a couple of years. If so, he is on shaky ground. First, such a claim is at odds with long-term interest-rate data. As I indicated in my article, long-term mortgage rates were not low during the housing boom. It’s not hard to find commentary from those years recognizing the low short-term rates were not expected to last.
To this, all I can say is, “What the hell are you talking about, Prof. Mulligan?!”
Seriously folks, look at this chart:
So if by “not low” he meant “the lowest they have been in the 35 years for which the St. Louis Fed keeps records,” then OK I see his point.
In fairness, maybe he means inflation-adjusted mortgage rates weren’t low during the housing boom. But at the very least he could have clarified that.
But this just goes to show that when people start throwing evidence at you for why Greenspan couldn’t possibly have caused the housing bubble, be sure to first make sure what they’re saying is even true. Then, once you’ve verified that they’re not saying the opposite of reality, you can go ahead and decide if it affects your opinion of Greenspan.
