Stirling Newberry: Depression by Design: The Riot of the Rich

…It is also important to see how the events of the last decade are being rewritten rather rapidly, most particularly, Iraq is being sent down the memory hole. Even economists who admit that the Federal Reserves very low interest rate policy of the middle part of the decade contributed to the credit bubble, seem to have forgotten why this was done. One part was in response to the dot com crash, but the other part was to accommodate the Iraq War. By running low interest rates, the Federal Reserve enabled an administration that wanted guns, butter, and no new taxes. This is hardly a hands off approach to central banking. Greenspan argued for administration policies, including the ill-considered tax bills of the early 2000’s and the “ownership society” which pushed home ownership.

Thus the most important proximate reason for this crisis is being overlooked entirely. It was not the fraud of banks, nor global imbalances that were the driver, but the fraud of the policy of monetizing homes to borrow money to pay for a war that would not return. If there was a ponzi scheme, the first and foremost runner of it, was Bernanke himself, who architected an economic policy which pushed for monetizing homes now, and profitizing revenue now. It is also impossible to look at the academic record and not see that the past was not one of great moderation, but of a radicalism of the right, which was confident in its ability to deal with problems laid out during the Depression by use of new tools of macro-economics.


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  • I suppose Alan Greenspan made have said something like this around 2001, but it is just as plausible that he dropped Fed Funds to 1.0% to combat the risk of deflation following the bust. The fact that this triggered a housing boom was a secondary benefit – probably welcome at first, and then alarming to a few people at the Fed except for Alan Greenspan.

    I suppose Stirling’s bias as an economist is to see developments as the result of economic deliberations and actions. As someone in the markets, I see the markets as the dictator of public policy actions, particularly monetary policy. The Fed Funds rate has always been a lagging rate when plotted against bond market yields for Treasuries. The market is the first responder to market conditions, the Fed follows. We see the market at the moment rising because of a possible bottoming out of the recession; the Fed certainly isn’t raising rates at this point because it doesn’t speculate, it waits for economic confirmation. If the market is right, the Fed may eventually raise rates.

    The ability to treat homes like commodities was developed in the 1980s and 1990s with the home equity line of credit. The Fed had nothing to do with this Wall Street invention other than to acquiesce in it as banks pushed the product.

    The new monetarism tools that Stirling talks about at the end certainly exist, such as all the acronym programs and buying up Treasuries and bad bank assets. But monetizing homes is not a tool for the central bank and to me not a deliberate policy of the 00’s.

    In his last paragraph he talks about profitizing revenue, but I don’t know what this could possibly mean.

  • The fact that this triggered a housing boom was a secondary benefit – probably welcome at first, and then alarming to a few people at the Fed except for Alan Greenspan.

    No doubt that Greenspan was initially reacting to the bust, but many economists (Black) and marketeers (Denninger, Mish) think that the Fed’s loose policy and lax attitude to regulation and oversight led to the housing crisis in that without the Fed’s acquiescence, if not implicit support, the crisis could never have reached the proportions it did. However, there’s plenty of blame to go around, not the least of which was the fraud enabled by mortgage brokers that was “overlooked” all the way up the chain of fiduciary responsibility.

    The most salient question about Stirling’s article seems to be whether he has a valid point in claiming that neoliberals thought that subsequent discoveries, principally by Milton Friedman, obviated a repeat of the Great Depression, allowing the financial sector to essentially redo the Roaring Twenties with impunity and proceeded to test this hypothesis with disastrous results.

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