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Fed Policy Caused Financial Crisis?

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Austen Posted: Sun, Nov 18 2012 10:56 PM

Was the Federal Reserve's monetary policy the proximal cause of the financial crisis of 2007-2008? Also, what are the best free market sources for information and argumentation on this mechanism (e.g. published papers, data, forecasted predictions, etc)?

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fegeldolfy replied on Sun, Nov 18 2012 11:34 PM

Pretty much. I'm not too informed on the subject, but essentially it was Alan Greenspan's lowering of interest rates in response to the NASDAQ bubble. Doing this created a bubble in the housing market. Again, this is a very crude explanation, and I'm leaving a lot of stuff out.

 

For more info, definitely check out Thomas Woods's "Meltdown" and perhaps some books by Peter Schiff. Also handy is Doug French's "The Rise and Fall of the Home Ownership Myth", and I think Thomas DiLorenzo has a chapter on the housing bubble in "Organized Crime", which can be found as a PDF in the Literature section.

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Austen replied on Mon, Nov 19 2012 2:27 AM

If fractional reserve banking was nonexistent, would the housing bubble have likely occurred?

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If fractional reserve banking was nonexistent, would the housing bubble have likely occurred?

FRB "only" aplifies the monetary inflation created by the central bank, by a constant factor. Even without FRB the CB has power to create bubbles.

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I don't think so, but I could be wrong.

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Anenome replied on Mon, Nov 19 2012 3:58 AM
 
 

Austen:

If fractional reserve banking was nonexistent, would the housing bubble have likely occurred?

Yes, because it was being driven by the driving down of underwriting standards created by legislation and pressure on banks, with the risk supposedly mopped up by the QuaNGOs Fannie and Freddie offering to take any loans produced by anyone, virtually no questions asked.

FRB wasn't a huge issue in that sense. Maybe the crisis wouldn't have been as large without FRB, because there'd be less credit out there generally, but Fannie and Freddie offering to take loans would be a defacto expansion of credit.

 
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Austen replied on Tue, Nov 20 2012 6:19 PM

Does anyone know of better sources for some of these ideas? Specifically on the Financial Crisis?

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This might be a good place to start: Great Recession

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Anenome replied on Tue, Nov 20 2012 7:34 PM
 
 

I suggest Sowell's book: "Housing Boom and Bust."


Here's an article / interview with him on the book and topic; the opening made me smile, so simple:

Newsmax.TV's Kathleen Walter asked Sowell what caused the "house of cards" in the housing market to collapse.

"The most fundamental thing is that the money that was normally paid for monthly housing payments stopped coming in, or stopped coming in in the volumes that it had in the past," said Sowell, a senior fellow at the Hoover Institution at Stanford University.

"The question then is, why did that happen? And the reason that happened was that banks and other lending institutions began lending to people who did not meet the traditional standards for mortgage loans, but were given those loans under pressure from government regulators, and even in some cases under threats from the Department of Justice if their statistics didn't match what the Department of Justice thought they should be — for example, in terms of income levels, race, what communities they invested in, and so on."

Walter noted that Sowell asserts in his book that politicians in Washington were trying to solve a problem that didn't exist.

"The problem that didn't exist was a national problem of unaffordable housing," Sowell explained.

 
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Here is also a nice refutation of the notion that most bad debt originated with the private sector.

Freedom of markets is positively correlated with the degree of evolution in any society...

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Read Thomas Sowell's The Housing Boom and Bust and Thomas Wood's Meltdown.

They highly complement each other. Sowell focuses more on the specific policies incentivizing housing production, while Woods focuses more on the role of interest rates.

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