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.


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.

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


Cash in search of a return


Great Rotation Out of Bonds?


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.

An Excellent Guide to Using Gretl

I don’t know how Gretl compares to R or expensive packages like EVIEWS or Stata but it may be worth a look.

Fixing the Economists


For those that don’t know Gretl is a freeware econometrics package. Despite not costing anything I’ve found it to be a very useful econometrics program that can do pretty much anything — or, at least, anything that I’ve ever wanted it to do.

Gretl can be a bit daunting to use, however. This especially so given it’s ‘stripped down’ presentational format (which I rather like, but others may not). Anyway, the author Hishamh over at the Economics Malaysia blog has put together a series of post that guides the user through all the major uses of Gretl. The posts, complete with screenshots, are indispensable and I will here run quickly through what they show.

In the first post the author shows how to input and format data.

In the second post the author shows how to run and interpret a regression.

In the third post the author shows how…

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