Wednesday, Nov 19, 2008
Lots of graphs and great info on the housing bubble.
Mises Institute: Did the Fed, or Asian Saving, Cause the Housing Bubble?
Just about the only good thing to come out of the housing bubble is that many financial analysts are coming to see the virtue of the Austrian theory of the business cycle. Specifically, though Greenspan did his best to blame deregulation and foreigners who saved too much, many people now think that the Maestro's ultra-low interest rates in the wake of the dot-com crash may very well have sowed the seeds for our current crisis. Naturally, there is more to the story of the housing boom than simply saying, "The Fed chairman did it." 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.
Posted by planning4acrash @ 11:25 PM (448 views) Add Comment
4 Comments
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1. paul said...
It is this kind of debate (examining the role of the BoE, MPC and treasury in stoking the credit boom) that we're not having in the UK right now.
2. planning4acrash said...
Is a very important point, that, whilst all parts are culpable, none could have done this without central bank involvement and their inflationary activities. The buck ends with government and central banking. The problem is the fiat money system and the solution is sound money and deflation/destruction of the debt.
3. rm96696 said...
Certainly the lion's share of the credit for the u.k. housing bubble goes to the bank of england. The 2005 base rate reduction was a farce and one of the main factors in stoking the final leg of the bubble. But certainly gordon the banks who lent on the belief that housing prices always go up did their bit.
4. Kruador said...
The 'asian savers' story continues the myth that lending is based somehow on the amount of deposits made. It is, and it isn't. Based, yes, in that where fractional reserve limits exist (amazingly, none at all in the US and UK), the deposits limit how much money creation the banks can do. But it's certainly not 1:1.
Unfortunately the statistics are hard to follow as they don't track how much deposit activity comes simply from borrowing (yours, at a lower rate than the interest you expect to get on the deposit, or someone else's to pay you for an asset).
Things went crazily wrong when banks started to believe they could hide their loans under the carpet and governments didn't hold them to fractional reserve requirements, allowing untrammelled expansion of the money supply, as fast as banks could get greedy consumers to swallow new loans. The government's measure of inflation, the consumer price index, was a bad proxy for real inflation as it wasn't measuring house prices, oil futures, stock markets, gold futures, leveraged buy-outs, etc, etc. Real inflation was massively out of control.
It's really only been this year that, as some of those markets collapsed, the futures markets that impact consumer prices spiralled and impacted CPI. Ironically this has happened at a time when real money supply has contracted relative to production, causing real deflation. Again, consumer/retail prices are out of step with the rest of the economy.