Did the Fed cause the Crash of 2008?

Excellent post… unless you believe in fairy tales like the natural rate of interest, NAIRU, the money multiplier, monetary policy’s role in the so-called “Great Moderation” and the ability of all nations to run balanced budgets at all times.

Yanis Varoufakis

The Crash of 2008 is often blamed on the Fed’s overly ‘loose’ monetary policy after 2001. In short, the argument goes, American monetary policy was too ‘loose’ for four years between 2002 and 2006; and too ‘tight’ once the Fed realised that it was presiding over an unsustainable boom. In this post the reader can read a long article (click here for the complete pdf)  in which I debunk this simplistic, and fatally flawed, theory. 

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Dark side of housing-price appreciation

Figure 1. Housing prices and real estate loans

From a vox piece by Indraneel Chakraborty, Itay Goldstein, Andrew MacKinlay:

Are housing price appreciations always desirable for the real economy? Unfortunately, the answer to this question is negative. As discussed in the theory of rational bubbles, an increase in housing market activity may crowd out commercial and industrial lending through increased interest rates. As a result, one sector of the economy that is receiving liquidity and experiencing bubbles may overheat, and crowd out other sectors of the economy….The normative implications for the economy are significant – if monetary policymakers are actively supporting one sector of the economy, such as the housing market, they are causing a detrimental effect for other productive sectors.

Figure 2. Housing prices and commercial and industrial loans

Authors’ Conclusions:

While prior research has investigated the effects of a contraction of bank balance sheets on firm activity, our paper is the first to investigate the role of banks in capital allocation when asset prices are rising in a specific sector of the economy. We find that it is incorrect to assume that an expanding balance sheet leads to positive spillover effects across all sectors of the economy. There is a crowding out effect in which banks divert resources across sectors – in the case studied in our paper, rising real-estate prices lead banks to cut commercial loans and increase real-estate loans.

If the change in relative prices is market-driven, then banks can be seen as reallocating resources across sectors to support the growing sector. However, if the price change is policy-driven, then the channelling of assets to one overheated sector of the economy at the expense of other (potentially more productive) sectors may not be the consequence policymakers have in mind.

Read the full vox piece here.

References:

Chakraborty, Indraneel, Itay Goldstein, and Andrew MacKinlay. Vox, “Dark side of housing-price appreciation.” Last modified November 25, 2013. Accessed November 25, 2013. http://www.voxeu.org/article/dark-side-housing-price-appreciation.

As the door turns

plus ça change, plus c’est la même chose
I mentioned the regulatory capture angle awhile back: http://www.bloomberg.com/news/2011-05-12/goldman-sachs-viewed-unfavorably-by-54-in-poll-showing-no-damage-to-firm.html

Real-World Economics Review Blog

from David Ruccio

revolving-door

We can now add former Treasury Secretary Tim Geithner to the long list of those who have walked through the revolving door between Wall Street and the White House, which makes Noam Scheiber just a bit worried.

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10 Trillion in Cash – Where is it going?

What happens to financial capital looking for a return? In this case, that financial capital is 10 Trillion dollars and, as US equity returns attest this year, those funds have been deployed in risk assets.

In this video FT’s John Authers speaks with Avi Nachmany, co-founder of Strategic Insight.

Charts from the video are below:

Flows into Passive funds and ETFs increasing

net.inflows.funds

Cash in search of a return

sea.of.cash

Great Rotation Out of Bonds?

mutual.fund.industry

Full Pundit: Rob Ford — 300 pounds of sad

Requiem for a Heavyweight: we are far from the denouement of the Rob Ford saga. The forces that brought him to power in City Hall: suburban alienation, general resentment at the profligacy of the Miller years (on the back of City of Toronto tax payers), and a bully pulpit via mass media have not disappeared. Here’s hoping that the city can move forward with mature reasoned leadership after this which balances a vision of urban and suburban renewal with a respect for fiscal sustainability.

The case for a land tax, BIS edition

Will the BIS go “Henry George” on us? Perhaps there is late recognition that houshold balance sheets outstripping household incomes is an eventual recipie for either a crash or long term moribund growth given that the liquidity contraints households come under as a result of long term debt servicing of ever increasing liabilities.

Real-World Economics Review Blog

The BIS (Bank for International Settlements) does not explicitly mention a land tax. But their recent study on ‘non-interest policy tools’ to stabilise house prices yields that such a tax on the ‘location, location, location’ value of houses might, together with abolishing interest deductions, be what we need (emphasis added):

Using data from 57 countries spanning more than three decades, this paper investigates the effectiveness of nine non-interest rate policy tools, including macroprudential measures, in stabilising house prices and housing credit. In conventional panel regressions, housing credit growth is significantly affected by changes in the maximum debt-service-to-income (DSTI) ratio, the maximum loan-to-value ratio, limits on exposure to the housing sector and housing-related taxes. But only the DSTI ratio limit has a significant effect on housing credit growth when we use mean group and panel event study methods. Among the policies considered, a change in housing-related taxes is the only policy…

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