I am making this a stand-alone post, rather than a comment on the article itself, to ensure that as many people see it as possible. In my recent piece on evidence that the Fed caused the housing boom, I argued that Henderson and Hummel were wrong for implying that the monetary base grew more rapidly in 2001 than in 2002. In contrast, I claimed that the average annual base grew more rapidly in 2002 than in 2001.
Well shucks, both claims are right. What happened is that the base grew very quickly in the last four months of 2001, partly because of the 9/11 attacks. So there is a difference between looking at a year’s growth by comparing start and end levels, versus computing the annual average and then comparing it to the next year’s average. If you want the specifics, I spell them out here.
As I explain in the blog post linked above, this clarification helps and hurts me in my dispute with H&H. On the one hand, it fits in with the “blame Alan” case because the monetary base expanded most rapidly right when he was cutting rates the most; the fed target fell from 6.5% to 1.75% in 2001 alone. On the other hand, pushing the huge spike in the base back a year, makes it less obvious that it was directly related to the ludicrous phase of the housing boom.
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Looking at the housing price chart you provided, it does look housing prices started rising as the mortgage rates were falling in Spring/Summer of 2002. But I don’t think it hurts your case too much that the money flood began in ’01, since it would probably take a little while for that new excess liquidity to hit the markets, particularly during the fear-soaked months following 9/11. A causal connection requires temporal priority, after all. And while a jump in the money supply will cause a boom, there’s nothing showing that it has to be an immediate boom – this would still depend on the discretion of market participants, who were (if I remember correctly) feeling pretty conservative in late ’01 and early ’02, and thus would have taken a bit of time to build up their lending and borrowing of the newly created artificial capital.
Or am I missing something here?
Another good article, Robert
What I find curious about the M3 money supply is that in the months preceding 9/11, the M3 supply was already growing at 12%. If fact, it had been over 10% for the whole year.
The Fed discontinued reporting M3 in Feb 2006. At that time the M3 was just above $10 trillion. Using the same methodology, as of September 2008, the M3 was at $14 trillion.
The idea of changing government economic statistics is referred to as “the Polyanna Effect”.
A good example is the change from GNP to GDP- this eliminates the negative effect of financing a balance of trade deficit. Perhaps one of the professional (Austrian School) economists on this site could clarify the difference between GNP and GDP?
i second walt d. it’s about time more articles on the national accounts (history, rational, and shortcomings) started to appear on mises.org.
professor reisman seems the only austrian to consistently hammer on the inadequacy of the gdp construct. as everything in the public debate is framed in terms of gdp, its flaws must be exposed if we’re ever going to squash keynesianism.
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