The Corner

Did the Fed Cause the Housing Bubble?

That’s the question the Wall Street Journal asks six scholars this morning. Here are their answers:

David Henderson (Hoover Institution)

 “Serious work by economists Lawrence H. White of the University of Missouri, St. Louis, and George Selgin of West Virginia University makes a persuasive case that abolishing the Fed and deregulating money would improve the macroeconomy. I’m making a more modest claim: Mr. Greenspan was not to blame for the housing bubble.”

Gerald P. O’Driscoll Jr. (Cato Institute)

 “In summary, Fed policy did help cause the bubble. Subsequent policy responses by that institution have suffered from sins of commission and omission. As Mr. Taylor argued, the government (including the Fed) caused, prolonged, and worsened the crisis. It continues doing so.”

Todd J. Zywicki (Mercatus Center and George Mason University)

“There were other factors that exacerbated the problem — most notably increased risk-layering and a decline in underwriting standards — but the Fed’s artificial lowering of short-term interest rates and the resulting substitution by consumers to ARMs triggered the bubble and subsequent crisis.”

David Malpass (Encima Global LLC)

“The blame for the current crisis extends well beyond the Fed — to banks, regulators, bond raters, mortgage fraud, the Bush administration’s weak-dollar policy and Lehman bankruptcy decisions, and Congress’s reckless housing policies through Fannie Mae and Freddie Mac and the Community Reinvestment Act.

But the Fed provided the key fuel with its 1% interest rate choice in 2003 and 2004 and “measured” (meaning inadequate) rate hikes in 2004-2006. It ignored inflationary dollar weakness, higher interest rate choices abroad, the Taylor Rule, and the booming performance of the U.S. and global economies.”

 Judy Shelton

“The Fed owns this crisis. The buck stops there — but it didn’t.” 

Vincent Reinhart (The American Enterprise Institute)

“The Fed is guilty as charged in setting policy to achieve the goals mandated in the law. Fed policy makers cannot be held responsible for the fuel to speculative fires provided by foreign saving and the thin compensation for risk that satisfied global investors. Nor can the chain of subsequent mistakes that drove a downturn into a debacle be laid at the feet of the Federal Open Market Committee of 2002 to 2005. If the results seem less than desirable in retrospect, change the law those policy makers were following, but do not blame them for following prevailing law.”

Read the whole thing here.


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