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> This will go down as one of the biggest policy mistakes in Fed history. The Fed largely caused the 2008 crisis by underestimating the effects of falling hous

> This will go down as one of the biggest policy mistakes in Fed history. The Fed largely caused the 2008 crisis by underestimating the effects of falling house prices on bank solvency. What's crazy is that all I hear about in the financial press is how the Fed saved the economy after 2008. Conveniently omitted is that their miscalculations also caused the crash. Whenever the Fed talks about finding a soft landing, I get nervous.

adam_arthur 5y ago
The Fed helped create the housing bubble to begin with. Greenspan cut rates massively after dotcom popped and took his sweet time to normalize. Bernanke certainly could have worked with fiscal policy to bring down housing in a controlled way, as it become an out of control snowball. Of course there were many other factors too, government policy encouraging and guaranteeing subprime mortgages, clueless borrowers, faulty credit assessments, too much leverage. IMO the government should seek not to create bubbles and also to set up a structure where it's inherently difficult for them to form. E.g. Limiting leverage for investors/important institutions is an obvious one. A system that relies on participants making smart decisions is doomed to fail in the long run. If buy and hold residential SFH investors were only allowed to lever up to 2x to 1, you would see significantly less speculation in SFH with minimal downside outside of investment returns for those investors. It really doesn't take a lot to set up a safe structure while still leaving it a mostly free market. Just requires foresight and a willingness to curb some of the fun/exuberance in the short run
- socksset 5y ago
  It is hysterical Greenspan gets blamed for this when we have barely been able to keep rates off the floor the past 13 years since he left. https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS If 2002-2004 was keeping rates too low then what do you call the past 14 years?
  - adam_arthur 5y ago
    He cut the funds rate from 6% to 1% pretty much overnight, which was excessive given there was only a mild recession at the time. To his credit he did start ratcheting it up shortly after. Low rate from past decade is for many reasons, high unemployment for most of the 2010s is the main one. Weak fiscal response to 2008 leading to slow recovery. The Fed shouldn't be the tool to try to address impact of a recession, it's much healthier to address through an intelligently crafted fiscal package. But the ease of being able to unilaterally set monetary policy tends to corrupt the Fed's decision making and skew it towards short term problems. All that being said, Greenspan did a hell of a better job than Powell overall
imtringued 5y ago
Are you joking? The Fed didn't invent liquidity preference and it also didn't invent low property taxes. When the government invests into a location, land value goes up over time as more people want to live there. Speculators start inserting themselves in the process and either occupy a plot that is bigger than they need (lots of homeowners) or outright own a second house/plot. The Fed can't solve that problem. Really, when you raise the interest rate, the only difference is that some of the money is now going to the bank instead of the landlord. It doesn't make housing more or less affordable as affordability is driven by supply and demand. 100 houses and 200 people => affordability goes down, 200 houses, 100 people => affordability goes up. By the way, I didn't say prices because affordability can be independent of prices. If you can borrow more from a bank, you still have to outcompete the next best bidder who also gets more money so borrowing more money doesn't make it easier to obtain a house in a popular location. Okay, I oversimplified it a bit, lower interest rates do make it more affordable to live in unpopular locations as some houses are going to be empty and thus very cheap regardless of the interest rate. This whole thing about betting on higher and higher house prices is just sick. Make houses and its land lose their value over time, that's the only way out.

adam_arthur 5y ago

The Fed helped create the housing bubble to begin with. Greenspan cut rates massively after dotcom popped and took his sweet time to normalize. Bernanke certainly could have worked with fiscal policy to bring down housing in a controlled way, as it become an out of control snowball. Of course there were many other factors too, government policy encouraging and guaranteeing subprime mortgages, clueless borrowers, faulty credit assessments, too much leverage. IMO the government should seek not to create bubbles and also to set up a structure where it's inherently difficult for them to form. E.g. Limiting leverage for investors/important institutions is an obvious one. A system that relies on participants making smart decisions is doomed to fail in the long run. If buy and hold residential SFH investors were only allowed to lever up to 2x to 1, you would see significantly less speculation in SFH with minimal downside outside of investment returns for those investors. It really doesn't take a lot to set up a safe structure while still leaving it a mostly free market. Just requires foresight and a willingness to curb some of the fun/exuberance in the short run

socksset 5y ago
It is hysterical Greenspan gets blamed for this when we have barely been able to keep rates off the floor the past 13 years since he left. https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS If 2002-2004 was keeping rates too low then what do you call the past 14 years?
- adam_arthur 5y ago
  He cut the funds rate from 6% to 1% pretty much overnight, which was excessive given there was only a mild recession at the time. To his credit he did start ratcheting it up shortly after. Low rate from past decade is for many reasons, high unemployment for most of the 2010s is the main one. Weak fiscal response to 2008 leading to slow recovery. The Fed shouldn't be the tool to try to address impact of a recession, it's much healthier to address through an intelligently crafted fiscal package. But the ease of being able to unilaterally set monetary policy tends to corrupt the Fed's decision making and skew it towards short term problems. All that being said, Greenspan did a hell of a better job than Powell overall

imtringued 5y ago

Are you joking? The Fed didn't invent liquidity preference and it also didn't invent low property taxes. When the government invests into a location, land value goes up over time as more people want to live there. Speculators start inserting themselves in the process and either occupy a plot that is bigger than they need (lots of homeowners) or outright own a second house/plot. The Fed can't solve that problem. Really, when you raise the interest rate, the only difference is that some of the money is now going to the bank instead of the landlord. It doesn't make housing more or less affordable as affordability is driven by supply and demand. 100 houses and 200 people => affordability goes down, 200 houses, 100 people => affordability goes up. By the way, I didn't say prices because affordability can be independent of prices. If you can borrow more from a bank, you still have to outcompete the next best bidder who also gets more money so borrowing more money doesn't make it easier to obtain a house in a popular location. Okay, I oversimplified it a bit, lower interest rates do make it more affordable to live in unpopular locations as some houses are going to be empty and thus very cheap regardless of the interest rate. This whole thing about betting on higher and higher house prices is just sick. Make houses and its land lose their value over time, that's the only way out.