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October 24, 2005
Greenspan's Legacy in Housing
Forget inflation, recessions, and stock market crashes. Hot Property aficionados want to know one thing about Alan Greenspan and one thing alone: What did he have to do with the housing bubble?
A new study by the Federal Reserve Bank of Atlanta--just published today--gives Greenspan a mixed report card on the housing bubble. Coincidentally, the paper was released on the same day that President Bush announced that Greenspan is stepping down Jan. 31 and will be succeeded by economist Ben Bernanke.
The paper somewhat contradicts Greenspan by concluding that the housing bubble is a national rather than a local phenomenon. Last May the Fed boss said, "We don't perceive that there is a national bubble but it's hard not to see ... that there are a lot of local bubbles."
The paper by Atlanta Fed staffers Marco Del Negro and Christopher Otrok uses advanced statistical methods to disentangle the importance of local vs. national factors in pumping up housing prices market by market. It concludes that in recent years, national factors have become more important than in the past.
Is easy monetary policy one of those bubble factors? The authors steer a complicated middle course on this one. First, they say, monetary policy has been only "slightly more expansionary" in the last few years than one might have expected. So the extra degree of easiness can't by itself explain the bubble. On the other hand, they say it's possible that housing would have inflated even with the ordinary amount of easing that would have been expected after the 2001 recession. In a classic double negative, they write:
Our result that the impact of monetary policy shocks on house prices was small in the recent period does not of course imply that the low interest rate environment experienced by the U.S. economy was not responsible for the housing boom.
Please, gimme a one-handed economist.
An interesting sidelight: One of the key analytical tools used in the paper was developed by none other than Ben Bernanke, who will be the next Fed chairman.
Bubbles, Economy, Housing Prices
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Greenspan is not near the central banker that people make him out to be. Paul Volcker should come to mind as the person who enabled the past 20 years of relative economic stability. He's the central banker who broke the back of inflation allowing for price stability which has nurtured the mostly smooth economic growth. Due to Greenspan's current policies we are at a high risk of runaway inflation in both asset and consumer prices, negating the painful work undertaken by Volcker.
Greenspan has repeatedly allowed dangerous bubbles to develop. The real-estate bust of 1989, the stock market bust of 2000, and the coming real-estate bust are all related to his economic policies. He was forewarned and even is on the record warning of the impact from those bubbles yet he did nothing meaningful to slow down their growth, instead hoping to mitigate the fallout. (He has admitted as such)
Peter, why don't you do an article like "Remember 1989" when the real-estate market last crashed and discuss the fallout involved (stagnant or declining property prices for a decade, recession, etc)? It would be a nice elixir for those with amnesia who proclaim that real estate never busts.
Posted by: Wes at October 25, 2005 11:13 AM
You asked me why I don't do an article with a headline like "Remember 1989." That's a good idea but I have an even better one: "Remember 1979." That's when the housing market REALLY tanked.
Posted by: Peter Coy at October 25, 2005 01:02 PM
Another perspective, from an "armchair economist."
Bernanke: Jedi Master
Posted by: Evan Moore at October 27, 2005 12:15 PM