The NYT appears to have been misled by Macroeconomic Advisers, one of the major macroeconomic forecasting firms that managed to miss the housing bubble. Lawrence Meyer, a former Fed Governor and the Vice chairman of Macroeconomic Advisers, told the NYT: “It’s unbelievable what has happened to all aspects of financial conditions in the past several weeks.” He then notes the sharp falloff in consumer and business spending. Of course the sharp drop in consumer spending is exactly what economists would expect to happen as the result of the loss of $5 trillion to $8 trillion in housing wealth. It is also not surprising that business investment would drop in response to a sharp falloff in demand. The financial crisis has undoubtedly worsened the situation, but the driving force is the loss of housing wealth, not the financial crisis. This article also includes an important mistake. It reports that the Fed has never before bought longer term bonds. Actually, prior to 1951 it often bought long-term bonds at the insistence of the Treasury. The Fed was first allowed to conduct monetary policy without interference from the Treasury Department in that year.
--Dean Baker