Hey, sorry if this is either really simple or makes no sense at all. I saw this argument in another forum and dont know what to make of it.
http://img132.imageshack.us/img132/9832/coincidenceag8.png
So someone is using these graphs - as confusing as they are, to say that housing prices inflated before the Fed lowered the interest rates. Here is what he said:
Topic: The Federal Reserve didn't cause the current crisis Sorry about the x-axis labeling, I suck with Excel. Notice how housing prices took off in the late 90's, while the Federal Funds Rate (the main instrument the Federal Reserve uses to act out monetary policy) was still high. What it did do was sustain and enlarge something that was already happening. The housing market was finally entering what may be considered recovery after the Savings and Loan crisis of the late 80's. If I had to pin an exact cause on this, I would put it to the global reaction over the Asian Financial Crisis of '98-'99. Previously, the huge amount of savings sitting in Asian banks (specifically Chinese banks) had been going into Asian tiger economies, like Thailand or Indonesia, but when they all went bust there was no where for this savings to go. So, this huge heap of Asian savings started flowing into American credit markets. Combined with things like the Gramm-Leach-Bliley Act (an act modifying the Community Reinvestment Act), the sudden drop of the FFR in response to the bursting of the dot-com bubble, and factors such as the loosening of bond bundling standards at Fannie Mae and Freddie Mac, housing prices boomed in a way they had never done before.The CRA a lot of people are citing wasn't really the cause of this, that had more to do with the leveraging crisis that has followed the popping of the housing bubble.The real lesson is that you can only delay a reckoning from a market bubble like the Asian Financial Crisis, not put it off entirely."
Sorry about the x-axis labeling, I suck with Excel.
Notice how housing prices took off in the late 90's, while the Federal Funds Rate (the main instrument the Federal Reserve uses to act out monetary policy) was still high. What it did do was sustain and enlarge something that was already happening. The housing market was finally entering what may be considered recovery after the Savings and Loan crisis of the late 80's. If I had to pin an exact cause on this, I would put it to the global reaction over the Asian Financial Crisis of '98-'99. Previously, the huge amount of savings sitting in Asian banks (specifically Chinese banks) had been going into Asian tiger economies, like Thailand or Indonesia, but when they all went bust there was no where for this savings to go. So, this huge heap of Asian savings started flowing into American credit markets. Combined with things like the Gramm-Leach-Bliley Act (an act modifying the Community Reinvestment Act), the sudden drop of the FFR in response to the bursting of the dot-com bubble, and factors such as the loosening of bond bundling standards at Fannie Mae and Freddie Mac, housing prices boomed in a way they had never done before.The CRA a lot of people are citing wasn't really the cause of this, that had more to do with the leveraging crisis that has followed the popping of the housing bubble.The real lesson is that you can only delay a reckoning from a market bubble like the Asian Financial Crisis, not put it off entirely."
I just have a few questions.
1) Is it accurate to say that housing prices rose before the Fed lowered its rate? i.e. is the data valid - I notice it is from a small sample size. The data came from these two sources: http://www.laalmanac.com/economy/ec37.htm and http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html
2) Does it matter if housing prices rose before the rate changed? Is that relevant? I feel like I am missing something simple...
3) Is the rest of his argument valid? For some reason I am having trouble understanding what he is saying.
BobT:2) Does it matter if housing prices rose before the rate changed? Is that relevant? I feel like I am missing something simple...
No, not really. Principally the Austrians argue that things like the housing bubble are the result of an inflationary boom... so more telling is the rate at which the money supply is expanding. The interest rates are affected by multiple factors (including consumer time preferences) so are probably less indicative than monetary expansion. The trouble with interest rates is that you never really know what the "market" rate for these would have been so you can't tell how much they diverge from what "would have" been normal. However if the money supply is expanding and the economy is experiencing price inflation, you can be certain that there are distortions happening somewhere and usually the Austrians would be inclined to look at interest rate senstitive investments (such as lengthening production cycles - housing is another one though).
That doesn't prove anything. All that it proves is that the Fed didn't lower rates. It doesn't prove that the interest rates weren't below the market rate.
Political Atheists Blog