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.

<snip>

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.

[indepat]

1. Greenspan, architect of two bubbles, stock market and housing, is also a major architect of the

social security refunding in the early Gipper years and supporter of junior's massive tax cuts resulting in an eventual multi-trillion dollar raid of the mythical "lock-box." Surely the name Greenspan will forevermore live in infamy.

[Demeter]

2. Well, There's a Grain of Truth In That

The desire for a domicile is something all creatures possess, and humans are no exception. But there is no longer a public policy that works to see this come about for all people.

We used to have policies and programs to promote, support and enable anybody to acquire a home of their own--not a rental, but genuine ownership. Then came the Reagan revolution and the first collapse of housing. It wasn't nationwide, but it was significant. Reagan cut all these programs off at the knees, if not the neck. He also destroyed the Savings and Loan Banking industry which was integral to the housing movement with his deregulation policy. Neil Bush made a bundle swindling people out of that.

Then came Bush Jr, true son of Reagan, more deregulation, more defunding of social programs. And now we see the results.

There would have been no subprime lending had those original, vanilla, accountant-tested public policies remained to serve another generation of Americans. There would have been no subprime lenders if the rules and regulations hadn't been erased.

And there wouldn't have been all the fraud, corruption, economic sinking, and disaster, without the GOP and their corporate enabling policies. Greenspan didn't do it alone--he had lots of help.

[UpInArms]

10. The Bush clan's family business - September 1, 1992

http://www.motherjones.com/news/feature/1992/09/bushboys.html

In 1991, President Bush bristled at a flurry of news accounts that questioned the business ethics of three of his sons. "The media ought to be ashamed of itself for what they're doing," Bush complained. "They have a right to make a living, and their relationships are appropriate," added a White House spokeswoman in June 1992.

Since George Bush has raised "family values" as a campaign issue repeatedly, though, it seems only fair to take a look at his own family. A computer search showed that over the past five years stories have periodically surfaced chronicling the individual business antics of the president's sons -- each riding comfortably through life in the slipstream of his father's growing power and influence.

Although a handful of good reporters for the New York Times, LA Times, Village Voice, and Wall Street Journal have diligently been digging through business records for months, something has been missing: an overview that "connects the dots" in the myriad deals that have been examined, making it clear that cashing in on influence has become a pattern of behavior extending through the first family.

Instead of criticizing reporters, the president might more wisely begin listening to those in government who have watched his sons with mounting worry. A year ago, I sat across a desk from a Secret Service agent who had been assigned to Bush-family security. I rattled off the names of a half-dozen questionable characters who had found their way into business deals with the Bush boys. How had these characters been allowed to get even close to the president's sons?

<snipping lots of wonderful information>

The $4.56 million loan, from Broward Federal Savings in Sunrise, Florida, was granted in such a way that neither Codina's nor Bush's name appeared on the loan papers as the borrowers. A third man, J. Edward Houston, borrowed the $4.56 million from Broward and then re-lent it to the Bush partnership. When federal regulators closed Broward Savings in 1988, they found the loan, which had been secured by the Bush partnership, in default.

...so much more worth the read...

[riona]

3. This seems to be the most logical reason to me

And didn't this boom help prop up the economy which was adjusting to that dot.com mess? Meanwhile, war and federal tax together have left many states looking for new sources of revenue. Here, property values soared along with too many new buyers and builders who went crazy slapping up new homes. The resulting high property taxes came in handy for all the new expenses. Well, now those taxes have to be lowered, and serious cuts in services and jobs have been made. People are losing their homes and there are new and old homes sitting on the market. I may not be an economist, but it appears to me that this administration's fairy tale economic policies are coming home to roost.

[PSPS]

4. Taylor conveniently omits the one ingredient that was essential for this to happen ...

... and that is the lack of regulation. It's crazy that people were given mortgages without having to document their income and otherwise meet the requirements of a conforming loan.

But this is Bushworld, where everything is OK -- even "payday" loans that charge 100% interest (example: Cash Call promoted by Gary Coleman) and more -- as long as the GOP gets its cut (via "campaign contributions.")

[1932]

13. Taylor might say that the low interest rates allowed banks to do that.

Low interest rates meant lower risk if you made an error lending to someone who eventually defaulted. Higher rates would have encouraged banks to be more strict.

[bemildred]

5. We have had one bubble after another since Reagan came in.

Real estate, savings and loan, tech boom, real estate. A Ponzi-economy based on fiat money shored up by our "reserve currency" status. And the other fellow is right about the importance of lack of regulation. Financial regulation was largely instituted to prevent bubbles and Ponzi schemes.

Greenspun was just doing his part in the post-Reagan economy. The interesting question is what will be inflated next?

[fedsron2us]

9. What will be inflated next?

Prices ?

A bankrupt government with increasingly bankrupt taxpayers is going to have problems financing the next asset boom without help from foreign investors. Since they have got seriously burned by the current 'sub-prime' debacle they may be reluctant to pony up the money. This means the Fed would have little alternative to monetizing debt to inflate the economy. What that will do to the value of the dollar is anyones guess.

[bemildred]

11. They are doing that (monetizing debt) already, but yeah.

I have always considered it kind of obvious that at some point we would see some serious inflation, if for no other reason than to screw all those suckers holding our debt.

[phantom power]

6. Wow, those geniuses figured that out all by themselves?

Gosh, lowering the prime rate to less than 1% (and utterly deregulating the credit industry) might fuel a credit bubble?

who could guess?
:eyes:

[KT2000]

7. All money to the free market

the low interest rate had the effect of moving most money into the market in one way or another.
The nest egg is gone for most of America while people fed the stock and housing bubbles.

Each time, the big guys who start the sell-off make huge money. Then people look to the next bubble to invest in.

[tanyev]

8. This administration can't even anticipate a terrorist attack when they've been warned 20 times.

How are they supposed to anticipate a housing boom?

[AlCzervik]

12. Hmm, no shit?