The Corner

Hummel, Henderson, the Fed, and the Housing Bubble

Over at the Independent Institute’s blog, the excellent Robert Higgs continues to debate his friends Jeffrey Rogers Hummel and David R. Henderson on the role played by the Fed in the current housing crisis. Hummel and Henderson have argued that the Fed’s responsibility is minor. Robert Higgs disagrees:

“Hummel and Henderson base their argument mainly on the claim that the Fed was not an engine of inflation between 2001 and 2006 because the rate of growth of the monetary base and the rate of growth of various monetary aggregates were declining during that period. Indeed, they were declining. Computing the rates of growth for the December value relative to the preceding December value, I find the rates to be as follows for the monetary base: 2001, 8.7%; 2002, 7.5%; 2003, 5.8%; 2004, 5.0%; 2005, 3.6%, and 2006, 2.9%. The rates of growth of M2, computed on the same basis, were as follows: 2001, 10.3%; 2002, 6.3%; 2003, 5.0%; 2004, 5.7%; 2005, 4.0%; and 2006, 5.4%.

It does not follow, however, that simply because these (and other monetary) rates of growth were declining; the Fed bore no responsibility for fueling the housing bubble. If we begin at a high rate of growth, as indeed we did in 2001, then rates may fall and still be “inflationary” in their effect on certain asset markets. Consider, for example, that during the entire period from the fourth quarter of 2000 to the fourth quarter of 2006, real GDP rose by only 14.9%, whereas during the same period (December-to-December monthly figures being used) the monetary base increased by 38.3% and M2 by 42.7%—or, by 2.6 times and 2.9 times as much as real GDP, respectively.”

Read more of Higgs’s very good arguments here.

Finally, Higgs has a new and well-worth reading piece called “A Dozen Dangerous Presumptions of Crisis Policymaking,” where he looks at and debunks presumptions like: Nothing like the present situation has ever happened before; or unless the government intervenes, the situation will get worse and worse, and we must act immediately; or government officials must act, knowledgeably or not; or my favorite of all time, fact finding, deliberation, study, and debate are too time-consuming and must be forgone in favor of immediate action.

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