The Fed and the Housing Bubble: Fool Me Once, …..

The financial press eagerly reported Federal Reserve Board Chairman Benjamin Bernanke's comments this week saying that he expected a gradual softening of the housing market, not a serious collapse. Mr. Bernanke's comments may reflect his true view of the housing market. However, it is also possible that these statements were made simply to soothe the financial markets.

One of the most fascinating stories in the stock bubble was Alan Greenspan's view of the Fed's proper role in dealing with the bubble. Following the bubble's collapse, Greenspan has publicly stated that he recognized the stock bubble, but thought it was inappropriate for the Fed to take any steps to reign in the bubble. This included saying anything publicly about the bubble. Greenspan's comments about the stock market as it was soaring to unprecedented price to earnings ratios were carefully crafted comments of noncommittal nonsense. He never said that a 5000 NASDAQ could be justified by fundamentals, but he was also very careful never to say that it could not.

Given that Mr. Greenspan thought that the Fed should not comment on a stock bubble, is it reasonable to think that he would have the same attitude toward a housing bubble. In other words, if Mr. Greenspan believed there is a housing bubble, would he tell us?

I don't have the answer to that one, but it does seem a reasonable question. It also seems to be an important piece of information that should be included in any news story that focuses on Greenspan or his successor's assessment of the housing market. In other words, if Greenspan, and now Bernanke, think the same way about the housing market as Greenspan thought about the stock market, they would not say that there was a housing bubble, even if they believed that there actually was one.

--Dean Baker

You need to be logged in to comment.
(If there's one thing we know about comment trolls, it's that they're lazy)

Connect
, after login or registration your account will be connected.
Advertisement