In this blog post at Pacific Research Institute, I criticize former Treasury Secretary Snow, who in a recent WSJ piece put the blame for the housing bubble on foreign savers. Naturally, I point the finger instead at Greenspan’s Fed. I think this episode is really getting other economists and investors to consider the Austrian business cycle theory.It’s really so obvious that it’s hard for anyone to deny that ABCT at least plays a part in what happened. Consider it this way: We’re trying to understand why there was a stampede of investment in a durable asset (housing) in the early and mid-2000s, and then all of a sudden things blew up.
Well gee, the Fed slashed interest rates to unprecedented lows during the boom, and then steadily jacked them back up right when the market tanked. Could the two be connected?
And even though this is old hat for veteran Austrians, the St. Louis Fed’s graph of interest rates (knowing the timing of the housing boom-and-bust) is powerful: