Ultra-low Fed rates stoked US housing boom: Taylor

[UpInArms]

Source: Reuters

JACKSON HOLE, Wyoming (Reuters) - In rare public criticism of Alan Greenspan, former U.S. Undersecretary for International Affairs John Taylor said on Saturday that ultra-low Federal Reserve interest rates had stoked the U.S. housing boom and subsequent bust.

Greenspan, who retired as chairman of the Federal Reserve in January 2006, slashed rates to an ultra-low 1.0 percent to protect the U.S. economy after the collapse of the technology bubble, the September 11, 2001, attacks and fears of deflation.

"A higher federal funds path would have avoided much of the housing boom," Taylor said, drawing on a model he designed to simulate housing activity if the Fed had raised rates instead of aggressively easing borrowing costs.

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Taylor, now an economics professor at Stanford University, designed the model to study what would have happened to U.S. housing starts if the Fed had been raising rates in 2002, in accordance with the recommendations of the Taylor rule.

Read more: http://www.reuters.com/article/bondsNews/idUSN0144589820070901

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Even if Greenspan hasn't been the object of partisan squabbling, his past actions have come under criticism recently. Some say the era of easy money for which investors are now paying began with the ex-Chairman's choice to cut the federal funds rate three times in 1998, in response to the near-implosion of hedge fund Long-Term Capital Management. Between 2001 and 2003, he cut interest rates 13 times, to a multidecade low, swelling the real estate bubble, critics say. On top of that, in 2004 Greenspan spoke in favor of subprime adjustable-rate mortgages that let people with limited credit buy real estate for very little down. In time, Wall Street bundled such mortgages together and sold them as high-yielding bonds—and in time those mortgage securities tanked.