As Markets Melt, Who Turned Up the Stove?
Actually the opening lines to this article are,
For more than three years, increasing numbers of economists have been raising yellow, then red, flags as we pointed out the dangers of the growth of credit, especially in the sub-prime mortgage markets. So, even if the Fed had high-powered money under control and even if the Fed had nominal measures of the core rate of inflation under control, surely they should have responded much earlier and more seriously to the run-up of credit that was funding the housing bubble. If they had seen these problems (and how could they miss them?), they should have slowed the rate of growth of high-powered money and they should have continued to inch the federal funds rate upward more than they did over that period. Doing so would have dampened the US housing demand and US housing bubble sooner and would have made things less of a crisis than they seem to be today.
When the velocity of money changes, it is the responsibility of the central banks to recognize the change and react accordingly. The Fed didn't.
As global markets melt like a slab of butter on a hot frying pan, it's about time to figure out who cranked up the stove.Beyond these pithy remarks, the article by Barrie McKenna is long on rhetoric and innuendo, but short on facts and data. However, it does raise one undeniable point which I shall attempt to rephrase here.
Where's Alan Greenspan, anyway?
Apparently, he anticipated our unwanted scrutiny.
The former U.S. Federal Reserve Board chief has taken great pains to shift blame for the mortgage crisis away from himself and the Fed's low-interest jet fuel of the 2001-04 period.
For more than three years, increasing numbers of economists have been raising yellow, then red, flags as we pointed out the dangers of the growth of credit, especially in the sub-prime mortgage markets. So, even if the Fed had high-powered money under control and even if the Fed had nominal measures of the core rate of inflation under control, surely they should have responded much earlier and more seriously to the run-up of credit that was funding the housing bubble. If they had seen these problems (and how could they miss them?), they should have slowed the rate of growth of high-powered money and they should have continued to inch the federal funds rate upward more than they did over that period. Doing so would have dampened the US housing demand and US housing bubble sooner and would have made things less of a crisis than they seem to be today.
When the velocity of money changes, it is the responsibility of the central banks to recognize the change and react accordingly. The Fed didn't.
Category: Economics, Macroeconomics, Money Posted on
Tuesday, January 22, 2008 at 10:58am
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