Monetary Policy

Bernanke: Low Interest Rates Still Didn't Cause the Bubble

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Ben Bernanke? That old wizard's crazy.

Federal Reserve Board chairman Ben Bernanke continues trying to sell a story nobody's buying: that the historically low fed funds rate throughout the past decade did not lead to the real estate bubble. Here's the relevant portion from his exchange yesterday with Rep. Ron Paul (R-Texas) at a House Financial Services Committee hearing:

Ron Paul: During the early part of the decade a lot of the free market economists would be saying interest rates were kept too low too long and there was a financial bubble and a housing bubble.  There had to be a correction. And of course we did in 2008. Since 2008 many of the mainstream economists have more or less agreed with that assessment, because frequently we'll hear them say, "Interest rates were held too low too long." And I think even Secretary Geithner has made that statement. Where do you come down on that perception? Do you think interest rates were held too low too long?

Ben Bernanke: Well Congressman, I've given a speech on this.

And I think the bottom line is that nobody really knows for sure but that the evidence is really quite mixed.

And I would say that even if they were too low for too long, the magnitude of the error was not big enough to account for the huge crisis we had. I think what caused the crisis was the failures of regulation. And I would fault the Fed here too, because some of those failures were ours in the sense that we didn't do enough—and I've admitted this and acknowledged this many times—we didn't do enough on mortgage regulation. So I think it was the weakness of the regulatory system, not monetary policy that was most important here.

Ron Paul: Of course I don't agree with that.

But if you assume for a minute that it was too low too long and you had perfect regulations, what is the harm done by interest rates being too low too long? Do you see any damage from interest rates being artificially low for a long period of time? Sort that away from regulations for a second.

Ben Bernanke: Well certainly one possibility which [former Fed chairman Paul Volcker]  knows a lot about is that if you keep rates too low for too long you'll get inflation. And every central banker wants to be sure that the price level remains stable. And that's an important consideration.

Ron Paul: Do you think the investor, the businessman makes mistakes if interest rates are lower than, say, the market? Aren't low interest rates an indication that there are savings, and if there are no savings but interest rates are low because of newly created credit by the Fed, does that not send a false signal to some investors and some business people?

Ben Bernanke: Well if interest rates are below their normal levels it's because the economy is operating at a very low level. I mean currently we're not in anything that an economist would call a Pareto optimal equilibrium or anything like that. We're certainly in a situation where a lot of people are out of work, and consumption is below its normal level, and low interest rates serve the function of creating demand and putting people back to work.

Ron Paul: But you don't think that if interest rates are two and three percent instead of six percent—without artificially low interest rates—there wouldn't be a temptation for people to build too many houses, or people to try to capitalize on the fact that they're anticipating price inflation and participate in the bubble?

Ben Bernanke: Well Congressman, interest rates are very low right now and I don't think building too many houses is really a problem.

Ron Paul: And that makes a very important point. You know, in the boom part of the cycle, interest rates cause people to do things that might not be proper and in the best interest of the economy, and then when the bust comes we resort to that same policy of keeping interest rates, you know, extremely low for too long. What are the chances? Do you think there's any chance that in a year or two or three and say, "Well not only were they too low too long in the early part of the decade, they were too low too long in the latter part of the decade." Because when the prices start to go up, it's sort of a little bit too late, then you have the job of reining that all in.

Ben Bernanke: Well it's a difficult, um… Central banking is an art, and we need to balance our dual mandate. Our dual mandate is to maximum employment and price stability. We need to find an appropriate policy that gets us as close as we can to that mandate.

Ron Paul: See the free market people see that it the dependency on regulation is just imaginary, because the fault is all these mistakes being made because they have false information. Nobody's advocating wage and price controls because of all the false information. You can't run an economy with price fixing, that's why socialism fails. But if you fix the price of interest rates, one half of the economy goes, "You're messing around with the financial system." And then all of sudden, instead of dealing with that we say, "We just need more and smarter regulations that will solve all these problems." Doesn't that concern you at all?

Ben Bernanke: Well you need some system to set the money supply. I know—I guess you're a gold standard supporter. I don't know. Is that correct?

Ron Paul: I'm for the Constitution.

Ben Bernanke: Every major country though, currently in the world, uses a central bank which must make some decision, whether to keep it stable or to move it around. Nevertheless it's a choice that's made.

This is the market in 2006.

I think Bernanke got the better of this exchange because debate is not about truth but about dinging people, and "interest rates are very low right now and I don't think building too many houses is really a problem" played pretty well. But his argument is very strange. If low interest rates are a mark of an economy below normal, then he must believe that the economy of the 21st century is competely different from the economy of even the 1990s. The fed funds rate has gone above 5 percent just twice since 2000, and the drastic, two-and-a-half-year campaign of rate cutting that began in 2001 was not really reversed until the middle of 2006—by which point all you had to do was attend a Sunday afternoon open house to know the real estate bubble was already beginning to pop. Take a look back at where the fed funds rate was in the mid-nineties. Take a Dramamine and look at where it was in 1990. Take heroin and look at where it was in the 1980s. I wouldn't want those interest rates back (though we all may get them anyway), but it raises a question Bernanke should at least address: Why did the Fed consider this past decade different from all other decades?

The weird part is that Bernanke has plausible deniability: The bubble was caused by the freebooting ways of his Ayn Rand-maddened predecessor.  But to do that would be to acknowledge too much about the Fed's limited—possibly non-existent—power to orchestrate outcomes. Bernanke would rather look like the last chump in the country than call the dignity of his office into question. I guess there's honor in that.

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  1. Well Congressman, I’ve given a speech on this.

    Only one?!

  2. Land use regulations caused the real estate bubble.

    Tim open your fucking eyes.

    1. Land use regulations caused the real estate bubble.

      They were an aggravating factor giving an appearance of scarcity, but it’s the endless fiat money that makes a bubble on this scale possible.

      -jcr

      1. They were an aggravating factor giving an appearance of scarcity, but it’s the endless fiat money that makes a bubble on this scale possible.

        Fiat money would have caused general inflation…not regional bubbles.

        In fact without growth management I suspect government fed low interest rates would have simply caused high inflation rates.

        1. In fact without growth management I suspect government fed low interest rates would have simply caused high inflation rates.

          Let me revise.

          Low interest rates caused high general inflation which has been hidden by productivity gains.

          I do not subscribe to Tim’s theory that no “real” wealth has been created since Clinton. High interest rates combined with unprecedented productivity gains has created the illusion that we are treading water. Of course in real terms on an individual level that illusion may as well be a reality.

        2. Fiat money would have caused general inflation…not regional bubbles.

          Nope. When the fed pours money into the market, it never spreads uniformly and instantaneously throughout the economy. If it did, there would be no point to inflating the money at all.

          -jcr

          1. Especially if it is pouring it into specific sectors, like the housing market.

            1. Especially if it is pouring it into specific sectors, like the housing market.

              So money the most fungible commodity on the planet is not fungible when it is used on housing?

              I think not.

          2. Really? no point? Last i checked inflation lowered the debt congress keeps heaping upon our nation.

  3. Compare and contrast with Maxine Waters’ classic questioning of Bernanke.

    I love that little old man.

  4. Hunter Lewis blames Alan Greenspan’s Keynesianism after the dot-com bubble (also caused by AG’s Keynesianism) for the crash.

  5. Excessively low interest rates caused the housing bubble.

    I wish someone would ask the appropriate question when Bernanke claims “regulatory failure”, which is:

    Since mortgages were defaulting at record low rates during the bubble, is it his position that he believes that regulators would have looked at record low default rates and concluded that there was something wrong with the design of mortgage products?

    Because if so, that’s simply an absurd claim.

    It’s like saying that if the FDA oversaw the testing of a new drug with record low side effects during testing, they would have preternaturally still make the decision to ban the drug, because regulators are psychic.

    There is no regulatory solution available when you completely fuck up the underlying data set by distorting the economy as a whole with excessively low interest rates.

    1. Excessively low interest rates caused the housing bubble.

      Wrong wrong and wrong and wrong again.

      If nationally low interest rates caused the real estate bubble then why was the bubble only seen regionally? And only in regions with growth management regulations?

      Please read this:

      http://www.cato.org/pub_display.php?pub_id=10570

      1. Or if you don’t want to read a 50 page policy analysis paper here is a shorter version:

        http://www.cato-at-liberty.org…..-planning/

      2. I agree. This wasn’t a national bubble. It was a bubble in California, New York, and Nevada. Housing prices in fly-over country never got too high, and so didn’t crash.

        It is also worth pointing out that financial bubbles happen from time-to-time. There isn’t always a villain, and it certainly wasn’t Alan Greenspan.

        1. Hey, you can’t talk bubble without talking Florida.

          1. Florida has restictive land use regulations that contrains the supply of land which create bubbles.

            Read:

            http://www.cato.org/pub_display.php?pub_id=10570

            http://www.cato-at-liberty.org…..-planning/

            Between 2000 and the bubble’s peak, inflation- adjusted housing prices in California and Florida more than doubled, and since the peak they have fallen by 20 to 30 percent. In contrast, housing prices in Georgia and Texas grew by only about 20 to 25 percent, and they haven’t significantly declined.

            In other words, California and Florida housing bubbled, but Georgia and Texas housing did not. This is hardly because people don’t want to live in Georgia and Texas: since 2000, Atlanta, Dallas?Ft. Worth, and Houston have been the nation’s fastest-growing urban areas, each growing by more than 120,000 people per year.

            This suggests that local factors, not national policies, were a necessary condition for the housing bubbles where they took place. The most important factor that distinguishes states like California and Florida from states like Georgia and Texas is the amount of regulation imposed on landowners and developers, and in particular a regulatory system known as growth management.

            1. All well and good, but regulations that restrict supply just raise the equillibrium price. Its a higher price, yes, but there’s no inherent tendency for it fall suddenly.

              1. Its a higher price, yes, but there’s no inherent tendency for it fall suddenly.

                So in your land of unicorns and dragons prices can just go up and up and up regardless of weather anyone can pay those prices.

                Sorry there is a price point at which people cannot afford it. When they can no longer pay or are unwilling to pay prices must drop. Simply law of supply and demand.

                A sudden drop in demand = a sudden drop in prices.

                1. You can get around the inability of people to pay huge prices by running the printing presses.

            2. I’m not seeing the argument against loose monetary policy. All this argument supports is that regulatory intervention EXACERBATES the market distortion. Prices will be even MORE distorted in such areas.

              1. All this argument supports is that regulatory intervention EXACERBATES the market distortion. Prices will be even MORE distorted in such areas.

                No.

                Read the article and look at prices of homes in regions without growth management. Those areas show no big increase in prices and they show no drop in prices after the bubble burst. Furthermore they do not show large foreclosure rates. Without growth management you do not have a housing bubble.

                This is not to say the financial system was not broken…and it is not to say problems in the market could have manifested elsewhere. But the simply fact is that without growth management you would not have had a housing bubble.

          2. I stand corrected, Pro Lib

        2. I agree. My house in Minneapolis only about lost 12% of its market value.

          1. In real or nominal dollars?

        3. That’s really not true. Housing prices skyrocketed in a lot of areas. Madison, WI for one, Oregon, most suburbs of major cities… etc.

          1. That’s really not true. Housing prices skyrocketed in a lot of areas. Madison, WI for one, Oregon, most suburbs of major cities… etc.

            Oregon has one of the most restrictive growth management policies in the county

            1. Fair enough, but I think you’re confused about something, Josh.

              Low interest rates provide the fuel for a bubble, not the direction the fire takes when it starts… Imagine if the government had ballooned the money supply, and encouraged people to buy something else with subsidies, special incentives, tax exemptions and other forms of social engineering bribery. Say……. Cars.

              The government puts policies in place to make sure “everyone” gets a new car, and then interest rates are lowered and money printed to the point where credit is available to anyone and everyone off the street.

              The incentive structure would create a bubble in cars, instead of houses.

              Land use requirements undoubtedly play a role, but you’re missing the catalyst.

      3. Because those are the regions people were moving to during the past decade. Interest rates could be -100% and you still wouldn’t see a housing bubble in Buffalo or Detroit; that doesn’t mean the interest rate isn’t too low.

        1. Because those are the regions people were moving to during the past decade

          Hardly anyone moved to California and tons of people moved to Georgia and Texas.

          In fact some of the fastest growing parts of the county had no bubble.

      4. The flyover states also happen to have decreasing populations and aging populations.

        It was easy for real estate prices in upstate New York to avoid the bubble, for the pretty simple reason that even with loose credit you still need buyers to access that credit and buy. If you have huge housing stock and a decreasing pool of buyers, the credit dollars will seek some other asset.

        You’re confused about what a bubble IS. A bubble is when misallocated capital pours into a single sector in search of returns. That requires two things: state manipulation of the money supply, and a plausible narrative to convince investors to pile into one sector. Capital always seeks out an outlet. If it hadn’t been real estate, it would have been something else.

        Also, the flyover country data is distorted by the fact that during the period in question, the price of real estate should have been decreasing – so the fact that the data show modest steady gains over the period isn’t really evidence that the bubble wasn’t in play there. Those nominally steady values were also disconnected from the underlying fundamentals. Detroit and Cleveland and Rochester real estate was actually worthless a decade before the market figured out it was worthless. The bubble gains in those locations weren’t realized by flippers; it was extracted in repeated refinances and in home equity loan plays. The bubble was still there; it was just like a mountain on the ocean floor – you just think it wasn’t not there because you’re looking at the waves on the surface.

        1. Yikes, sorry about the verb agreement issues up there. Trying to watch basketball and type at the same time.

        2. The flyover states also happen to have decreasing populations and aging populations.

          You are grasping. There has been huge growth spurts in Texas and Georgia, or should i simply call it fly over county and very little growth in New York and California.

          In fact from my understanding Massachusetts is the only state in the union that has negative population growth. They also had a housing bubble and they also have growth management policies.

          1. Might i suggest you actually read the papers I linked to rather then spouting off nonsense that has no bases in reality.

            Your folksy truisms are not helping you.

          2. ???

            Do you know what a bubble is?
            It isn’t just rising prices. Sometimes prices rise for legitimate reasons … like when land use regulations restrict supply.

            You’re thesis that we will see real estate bubbles as long as we have land use regulations is rediculous.
            Were there land use regulations involved in the dot com bubble? The tulip bubble?

            Why do we need to read a paper if you can’t even grasp what a bubble is?

  6. We have to have central planning because everyone else is doing it!

    Don’t confuse me with all your namby pamby “theorizing” about free market fundamentalsim…if every other country believes in central planning then it HAS to be right! When will these anti-intellectual conspiracy nuts give up on trying to reduce the Fed independence?

  7. I’m full of shit. We’ve been pissing our pants trying to kill Paul’s audit bill and there’s no way that I am not well aware of Paul’s views on the gold standard, no matter what I may think of them.

    “I guess you’re a gold standard supporter. I don’t know. Is that correct?”

    I’m a disingenuous sleazeball. Even zombie Greenspan had the dignity to at least feign respect.

  8. If we let these anti-intellectual populist keep reading all their austraian economic conspiracy books then anarchy is coming….when will my fellow intellectuals support burning these horrible books?

  9. If we hadn’t let this loon goldbug hi jack our libertarian movement with his conspiracy theories we would probably have made a ton more progress on real issues like abortion insurance trading credits for transvestites.

  10. Bernanke would rather look like the last chump in the country than call the dignity of his office into question……

    Hah…..he’s more than capable of doing both!

  11. The people who are against a centrally planned monetary system generally just don’t understand the math. Leave up to us, we R awesome at math.

    1. we R awesome at math.

      wait….did cosmotarian overlord compare himself to Republicans…

      I thought paleo Paul was a Republican rep?

      I have given up on getting a good working definition of cosmo and paleo…and have simply decided that anyone who uses these terms unironically is simply a complete fucking idiot.

  12. “Federal Reserve Board chairman Ben Bernanke continues trying to sell a story nobody’s buying: that the historically low fed funds rate throughout the past decade did not lead to the real estate bubble.”

    I’m buying it.

    By what metric were interest rates out of whack?

    I’ve looked at them all. I watched them all meticulously from 2003 through 2009, there weren’t any metrics that indicated we should have raised rates.

    There were some qualitative measures that maybe should have tripped an alarm or two–specifically regarding the quality of the loans that were being offered, and what happened between the time New Century cratered and Lehman went under is demonstrative…but that’s a regulatory issue.

    Go look at LIBOR for that period (July of ’07 to September of ’08) and you’ll see LIBOR dropping during that time–even at a time when credit and credit standards we know were tightening. That’s because LIBOR, the interest rate most variable mortgages were tied to, doesn’t tell anybody anything about the quality of the people getting the loans…it doesn’t tell us anything about volume either.

    So when credit is tightening, the interest rate can and often does drop, because only the people with the lowest risk of default are getting the loans, and so they’re getting lower rates…

    ..so are we saying the pricing of those loans in terms of interest rate is bad?

    The market was pricing those exactly where it should have.

    What was out of whack is that, for a number of bad, screwy, regulatory reasons, neither loan aggregators nor the people who were buying mortgage backed securities knew they were buying sub-subprime (no typo). They thought they were getting quality loans.

    I remember Greenspan state that when one of his research assistants told him that two-thirds of the loans being approved were sub-prime, he told them to go back and double-check–because he didn’t think that was possible.

    There’s only so much information an interest rate can transmit. It certainly wouldn’t have made any sense to raise interest rates amid a dearth of inflation–which was exactly the case during the period in question.

    Actually, we still haven’t seen much sign of inflation, even now. Quite the opposite (despite the cultish droning of one Mr. Paul), and to think people would argue that the Fed should preemptively raise interest rates, despite a lack of inflation, all in the name of less government? …just to prevent a bubble in housing?

    That’s a head-scratcher for me.

    I don’t want the Fed raising rates preemptively to pop bubbles it thinks it sees–the market does a better job of that. And I don’t know how anybody can say the Fed kept rates too low for too long given the information available at the time. I’ve seen all the metrics, and they didn’t indicate any such thing.

    There’s this thing, you see, called the economic cycle. And if it were possible to have a fed that was smarter than the market, it would still be subject to the cycle. It’s less predictable than the seasons, but just like the seasons, the cycle’s unavoidable–the tops are unavoidable.

    More people should know about it.

    1. by the taylor rule, the fed funds rate was out of whack from about 2002-2005

      1. I appreciate the Taylor Rule, whatever version of it.

        I remain skeptical, however, that even if interest rates had been higher, that we wouldn’t be dealing with a market top just the same, and for the same reasons.

        I also hope others can appreciate that finding out what happened after September of ’08 really wasn’t much of a deterrent to fed actions between 2002 and 2005. And I reiterate, there’s no way I want the Fed getting out ahead of market data and popping the bubbles it think it sees. …certainly not according to some formula.

        I also hope people appreciate that although market indications are the best we have to go by, they aren’t foolproof either, certainly not if we’re trying to get rid of the dips in the cycle.

        And that if it’s hard to say what should have been done in hindsight, that it’s even harder in real time.

        I maintain that the Fed was doing its level best to follow the market–like I think we want it to–and suggestions that it didn’t are misguided. …driven more so by political rhetoric rather than anything else.

        1. I also hope people appreciate that although market indications are the best we have to go by, they aren’t foolproof either, certainly not if we’re trying to get rid of the dips in the cycle.

          You sound like someone who’s had a thorough miseducation in economics from the Keynesian Priesthood.

          -jcr

          1. “You sound like someone who’s had a thorough miseducation in economics from the Keynesian Priesthood.”

            Not in the least.

            But I’m not so far out of touch that I think there wouldn’t be any market corrections if we didn’t have a Fed either. (not that anyone here was saying that, necessarily)

            Fed, No Fed, doesn’t matter–market corrections will always be with us. …especially in the debt markets.

            And, incidentally, my work required me to follow market rates closely enough to know that the Fed has been doing its level best to follow the market.

            …and that fact doesn’t change just because Ron Paul’s a politician and hopefully means well.

            1. Fed has been doing its level best to follow the market.

              I don’t buy it. The Fed’s entire purpose is to transfer wealth from everyone holding dollars to the government and their cronies by inflating the currency. Any other ostensible purpose of the Fed is nothing but propaganda.

              -jcr

            2. …and that fact doesn’t change just because Ron Paul’s a politician and hopefully means well.

              As are Greenspan and Bernanke…

            3. Ken, where were you in 2002-2003, when the news was a flutter for a few years on “historically low interest rates” and various economic stimuli coming out of the Greenspan Fed?

              I really encourage you to go read some of the stuff by Mark Thornton or the other Mises folks who started sounding the alarm on this bubble in 2002-2004.

          2. “I also hope people appreciate that although market indications are the best we have to go by, they aren’t foolproof either, certainly not if we’re trying to get rid of the dips in the cycle.”

            I suppose that might have been misinterpreted to mean that because market indicators are imperfect that means I think there’s something better.

            But I don’t.

            All we get is the markets and the data they give us–imperfect as that is, that’s the best we get.

            …and markets will continue to correct–with or without a Fed. Thank goodness the Fed has tried, more or less, to follow the market’s trend since, well, 1979, when Volcker was appointed.

            Yeah, I think Ron Paul is essentially criticizing a Fed policy that hasn’t really been followed since 1978, and I think he’s making a lot of my fellow libertarian look foolish in the process. …but that’s to be expected, right? Politicians pander to their base–that’s what they do.

    2. “Actually, we still haven’t seen much sign of inflation, even now. Quite the opposite”

      The gold bubble is soon to burst.

      1. It’s hard to say any commodity traded anywhere is being priced wrong. There are a lot of people in a lot of places in the world that are worried about inflation in their own currency for all sorts of reasons…

        But apart from that, the markets are telling us that inflation isn’t a problem. If anything, the markets are worried about deflation right now.

        …in terms of commodity prices falling.

        There’s always a market signal that can be interpreted as bearish–there are traders who make a career out of that. But inflation’s been, what, about a 1 percent this year?

        I know there are reasons to worry about inflation, but no one knows how much rope we have left. When we run out, yeah, that’s a steep drop–but there’s not much reason to think we’re about to run out of rope right now.

        The market’s telling us quite the opposite actually.

  13. This exchange was the most telling:

    Paul asks:
    Do you think interest rates were held too low too long?

    Ben answered:
    And I think the bottom line is that nobody really knows for sure but that the evidence is really quite mixed.

    So if he doesn’t know what the correct interest rate should have been in the PAST. How can he know what the correct interest rate should be set to for the future?

  14. Ben Bernanke: Well Congressman, interest rates are very low right now and I don’t think building too many houses is really a problem.

    Oh no he di’unt…

    How can he say this. How can he possibly say this?

    Is he saying building too many houses isn’t a problem in general? Right now? Historically?

    They’ve got entire subdivisions which were built on the come which are sitting empty right now. The market was overbuilt, period. And why was it overbuilt? Low interest rates and lax, easy access to homebuying credit that seemed to extend forever.

    1. Thats what I was thinking. If there are so many houses empty right now, which nobody buying, wouldn’t building more BE a problem, since there would be no buyers? Maybe he thinks keeping interest rates low will encourage people to take out loans to buy these homes, new or empty. But isn’t that what got us into this problem to begin with, creating artificial demand?

  15. “So if he doesn’t know what the correct interest rate should have been in the PAST. How can he know what the correct interest rate should be set to for the future?”

    gogo central planning!

    1. the problem is not that there are too many houses, it is just that aggregate demand is too low, we need the banks to be recapitalizedd so they can the demand going again. The fed is doing it’s level best to get this done.

      I agree with schultz(dude is a genius)We don’t want the fed popping bubbles. The fed can’t do better than the free market at popping bubbles and that is why we need a centrally planned monetary system with a secretive board of geniuses setting interest rates for the whole economy. What are you people communists?

  16. Land use regulations caused the real estate bubble.

    This might not be complete bullshit, but it’s close.

    1. This might not be complete bullshit, but it’s close.

      Then explain why the real estate bubble was regional and not national.

      Oh wait this is the internet i responded incorrectly.

      NO U!

      1. I have no idea what caused the real estate bubble or if rates were too high or too low but the best explaination for you is that bubbles happen in sectors. You might as well ask why didn’t the bubble happen in autos or high tech or pharamcuticals. Oh wait, one did happen in high tech.

        Just because the greatest price growth was not wide spread does not refute the claim that low interests rates mis-signalled investors and caused a bubble.

        I mean if land use regulation caused the bubble then why don’t we still have a bubble? We still have the regulations.

        1. I mean if land use regulation caused the bubble then why don’t we still have a bubble? We still have the regulations.

          Yup and in the future unless those regulations are removed you will get more bubbles in the future.

          This is why we call them bubbles…because they collapse when the prices get to high and no one is will to buy anymore.

          1. We don’t call them bubbles if the price goes up for a “valid” reason. Land use regulation does not cause bubbles. It can cause a price increase or decrease. It can cause volatility if the regulation is unpredictable but price change is not a bubble.

            BUT, sectors with rising prices are likely more susceptable to bubbles.

            Now, what causes the *bubble*?
            “Blame low intrest rates!”
            “No, it’s the animal spirits!”

            Kudos to anyone who gets the reference.

            1. Now, what causes the *bubble*?
              “Blame low intrest rates!”
              “No, it’s the animal spirits!”

              Georgia and Texas had low interest rates.

              I guess they must have not had those animal spirits of yours.

              http://www.youtube.com/watch?v=d0nERTFo-Sk

            2. It can cause volatility if the regulation is unpredictable but price change is not a bubble.

              By the way you are smoking crack if you think land use regulations in regions with Growth Management policies are predictable.

              1. I never said they were predictable.

                Back on topic. You claim the real estate bubble is caused by significant limits to supply. I’m sorry, that doesn’t cause bubbles. Limits to supply cause increases in prices. NOT bubbles.

                What CAUSES bubbles is a matter of great debate. The debate over what happens to prices when supply is restricted has been settled for a while.

                1. What CAUSES bubbles is a matter of great debate. The debate over what happens to prices when supply is restricted has been settled for a while.

                  So prices always rise because of changes in supply…except when its a bubble which are magical and unknown.

                  Animal spirits indeed.

                  1. I don’t really understand what you’re talking about.

          2. Now that you’ve figured it all out, why don’t you write a book and join the crowd?

            1. I think i would rather make money of the next housing bubble.

        2. I mean this as a joke, but don’t NY, CA, FL and NV boast higher levels of brown people than other states?

          1. Higher then Georgia or Texas?

            1. Nevada and Arizona are notorious for thier draconian and unpredictable land use regulations.

              1. The only way to get raw land in Nevada is to ask the federal government to sell it to you.

                Have you ever actually dealt with the federal government?

          2. No, but Texas has a lot of fatties.

        3. besides, everyone knows that george bush eliminated all the regulations…so regulations couldn’t have caused the bubble.

  17. Reason’s analysis in this article is totally confused. As a faux-libertarian outlet, it seems they are trying to kindof flirt with libertarian monetary philosophy (and run a Ron Paul article to get more hits I’m sure). However, as Reason does not embrace Austrian Economics, they just don’t get it.

    1. Reason’s analysis in this article is totally confused.

      I think it is only Tim who is confused. Most of the other Reason writers have not touched upon the the cause of the real estate bubble. Which is to say they are not confused they simply have not looked at it that closely.

      My suggestion to Tim is to call Randy O’Toole and have a talk with him about it. Or do what i did and actually compare real estate markets with and without growth management regulations and see how their bubbles played out.

    2. Indeed, DRINK! I toast with an Amaretto & Dr. Pepper to you, sir or ma’am.

    3. Since Austrian economics was mentioned, I thought I’d bring up this little nugget from Mike Shedlock:

      Unfortunately the Mises site chart functionality for producing year over year % change in TMS is hopelessly broken and has been broken for years and I have notified them a half dozen times to no avail so I cannot produce a chart of year over year % change in TMS for comparison.

      A lovely case of Libertarian Bureaucracy.

  18. Dishonest loan officers and borrowers certainly did their “best” to contribute to this fiasco.

    Anyone heard of NINJA loans????

    No Income,
    No Job,
    No Assets,

    But you qualify for a $500,000 mortgage!

    H.F. Wolff

    1. If Prices always go up, who gives a damn if the schmucks default. Bad assumptions throughout the sector mad sure no one caught it.

  19. Land use regulations restrict supply and increase prices, this much I agree with.

    However, a “bubble” is a different phenomenon.

  20. I think we can all agree that very low interest rates increase leverage, which is a necessary, if not sufficient, condition for a bubble.

    Serious question: Has there ever been a bubble that was fueled by credit/leverage?

    1. I think we can all agree that very low interest rates increase leverage, which is a necessary, if not sufficient, condition for a bubble.

      No it isn’t.

      There have been plenty of growth management driven real estate bubbles since the 1960s.

      Read this:

      http://www.cato.org/pub_display.php?pub_id=10570

      Before 1960, virtually all housing in the United States was “affordable,” meaning that the median home prices in communities across the country were all about two times median-family incomes. But in the early 1960s, Hawaii and California passed laws allowing cities to regulate rural development. Oregon and Vermont followed in the 1970s. These states all experienced housing bubbles in the 1970s, with median prices reaching four times median-family incomes. Because they represented a small share of total U.S. housing, these bubbles did not cause a worldwide financial meltdown.

      In the 1980s and 1990s, however, several more states passed laws mandating growth-management planning: Arizona, Connecticut, Florida, Maryland, Rhode Island, and Washington. Massachusetts cities took advantage of that state’s weak form of county government to take control of the countryside. The Denver and Minneapolis-St. Paul metro areas adopted growth-management plans even without a state mandate. As a result, by 2000, prices of nearly half the housing in the nation were bubbling to four, six, and in some places ten times median-family incomes.

      Could the low interest rates have lined up the regional bubbles to happen all roughly at the same time? perhaps.
      But to say those bubbles would not have ever happened without low interest rates i think is a huge stretch.

      1. But in the early 1960s, Hawaii and California passed laws allowing cities to regulate rural development. Oregon and Vermont followed in the 1970s. These states all experienced housing bubbles in the 1970s, with median prices reaching four times median-family incomes.

        There’s your increased leverage right there.

    2. Wasn’t the real estate bubble fueld by credit/leverage?

      1. Of course it was.

        And most of that subprime was tied to LIBOR, which is, more or less, about as market driven as we can hope a rate to be, isn’t it?

        Was LIBOR too low for too long?

        1. good point Schultz. LIBOR is the the definition of free market, no political entities have anything to do with the currencies that banks in London use.

          1. Yeah, I guess you’re right, Cosmo.

            Markets wouldn’t have tops if there wasn’t a Fed?

            Banks wouldn’t lend to each other at market rates if it wasn’t for the Fed?

            That doesn’t make any sense to me. Why don’t you explain it to me?

            Financial institutions wouldn’t have invested in mortgage backed securities if it wasn’t for the Fed?

            And while you’re explaining all of this, be sure to tell me, is there anything that can’t be blamed on the Fed? …any market top anywhere that isn’t the Fed’s fault?

            Correct me if I’m wrong, but weren’t there market tops before there was a Fed? Haven’t there been market tops in Beanie Babies and buggy whips, or were those market tops all Fed related too?

            Would there be an economic cycle without the Fed or is that the Fed’s fault too?

            You want a market traded rate–you’ve got LIBOR. It takes all kinds of things into account–are you proposing a magic rate that doesn’t take the value of the dollar (and other currencies) into account?

            Help me understand.

            1. Ummmm…

              LIBOR is the interbank overnight rate. That rate will go down if the banks have lots of cheap capital sloshing around that needs to be put to use on a short-term basis. It will ALSO go down if the banks perceive the credit soundness of all other banks to be extremely high, as they will in situations where the discount rate is unnaturally low.

              It’s absolutely impossible to find a true “market rate” anywhere when the largest single player in the system can flood the rest of the system with capital at will. That has all sorts of spillover effects. In fact, the entire reason we HAVE a Fed is to achieve those spillover effects. If the Fed’s actions didn’t move all other interest rates in the system, there would be no reason for the Fed to exist.

              1. “It’s absolutely impossible to find a true “market rate” anywhere when the largest single player in the system can flood the rest of the system with capital at will.”

                May I assume you wrote capital inadvertently? Even so, considering an alternate reality where that were possible might shed some rather unconventional light on the effects of the Fed’s existent ability to do so with the money supply.

    3. Serious question: Has there ever been a bubble that was fueled by credit/leverage?

      The leverage behind any growth management bubble is always based on ever growing prices because of artificially constrained supply of land. You get a loan on a really expensive piece of property because the bank thinks it will be worth 10-20% more in a year or two so its security is “safe”. You do not need low interest rates for this. It is easy to find regional growth management driven real estate bubbles in the high interest days of the 70s and 80s.

      1. regional growth management…

        …is the same thing as increased leverage.

        We are trying to make a distinction between economics and policy where there isn’t one.

  21. Blaming low interest rates for what happened is like blaming low wages for your company going under

    1. Wtf?

      That is a godawful analogy… F-

      1. FUCKK YOUUUUUUUUU Z——-

        1. Yeah… That’s the predicted response, given the pitiful nature of the original comment. Definitely gave you the right grade the first time around.

  22. I don’t think building too many houses is really a problem”

    Sometimes, I really can’t tell if Bernanke is a fucking idiot, or just an unbelievably glib liar. OF COURSE building too many houses is a problem. It’s a misallocation of resources, fueled by a fiat money bubble.

    Someone needs to slap Helicopter Ben upside the head, repeatedly, and with considerable force.

    -jcr

    1. I think his meaning was: “Right now, nobody is building too many houses.” Which is true and also irrelevant to what Ron Paul was asking about.

      1. ya we need more houses built…to help make the existing huge inventories sell faster. This will help increase the value of all the loans that are being defaulted on.

    2. I was in construction before and during most of that time…we positively redefined going gangbusters. Not seeing the situation as being as temporary as it turned out to be, I, like alot of people, spent more than I made. Now it’s time to pay down that debt. So, good luck selling me stuff; unless the bank feels like offering substantially negative interest rates, I won’t be borrowing for quite awhile.

      It’s a correction, not a crisis. A real crisis is what we’ll get by thinking that it is.

    3. OF COURSE building too many houses is a problem.

      Is it?

      So i am here sitting in growth management land on the more bloody side of a collapsing real estate bubble. I am a real estate developer. Is it a misallocation of resources for me to buy up foreclosed mostly finished plats from banks for pennies on the dollar finish up the development then undercut the market and sell those lots to frugal home buyers and builders? Hell the bank who sells me the land will even give me a loan to buy it.

      Why is cheaper lots and cheaper homes bad? Last I checked the problem was to many expensive homes and lots that no one could afford to pay for.

  23. and he actually knows a bit more ecnomics than spewing talking points, maybe?

  24. “Central banking is an art”

    So is any other con game. Bernanke should be the last chairman of the Fed. It’s long past time we got rid of our latest unconstitutional counterfeiting agency.

    -jcr

    1. Well, at least he admits there’s no economic science underpinning his work 😉

  25. Whatever caused this bubble, can we all agree that bubbles are impossible with free market interest rates and no bailouts?

    1. I can certainly agree to that…

      1. WHO THE FUCK CARES WHAT YOU THINK

        you idiot Z—-

    2. No, they’re not impossible; they could arise from any number of natural phenomenon — mistaken speculation on the possible value a newly-discovered resource, for example. Such would hardly qualify as a systemic issue though.

      1. If it’s not systemic, then it’s hardly a bubble worth caring that much about *AND* those are precisely the kinds of phenomenon that are short-lived because they’re based on mistaken information which would get corrected once reality doesn’t bear the fruits assumed by the speculation.

        Even the more famous examples of that kind of thing, for instance the Dutch Tulip Bubble in 1637 was precipitated by an increase in the money supply through an increase in deposits in the Bank of Amsterdam at the time.

        The point though is that markets self-correct if not prevented from doing so, and without governments blowing up bubbles with artificially cheap credit. So while locally prices will always fluctuate, on the whole, the economy can remain fairly stable and follow the slow deflation that is necessary for increased prosperity world wide.

        PS. Here’s Doug French on the Dutch monetary supply during “Tulip Mania!”

        1. I don’t disagree…I was just attempting to clarify an overly-absolute statement on the part of the OP.

  26. Moynihan, Jat Rockefller and I know that there is a bubble in conspiracy theories that must be popped. This stoopid internet is helping spread conspiracy theories because it is not regulated enough and we must stop this or our most valued national resources(our shared history) will be destroyed.

  27. There is a problem with building to many houses I am a frugal builder and home buyer. Banks are not giving out loans very easily now to people with great credit. Mine is around 830. I had a customer get three appraisals on great property in a great market Austin. It took me 4 months to close on a house that was worth 40k more than it was selling for. In any market adding too much of a commodity lowers the value of the exsisting commodity. So yes you can buy a cheaper house from the bank but it’s worth less and so are the others in the neighborhood. It’s dangerous because there are other factors in the economy that are causing deficit,.., by the time the houses you buy to sell get sold it’s unknown if the market will have corrected itself. If unemployment continues more people
    loose their homes and more can not get loans. There may be a finite amount of real estate or land but we are now where near that point in most places in the u s. I live in Texas and the market is still good but we have incredibly low cost of living. All of the government programs coming will cause taxes to go up or money to be printed. The new biometric Id alone is 39 billion. Health care etc. When looking at the larger picture it is obvious we are either going to have inflation or much higher taxes.

  28. paul tore benny a new asshole this round… funny to see the US’ supposed ‘greatest economic mind’ look so, so dumb.

  29. It is ironic that nearly everyone here is bending over backwards to prove Bernanke wrong using macroeconomic theory to explain regional housing bubbles.

    1. Josh, it really wasn’t all that regional. The fact that it happened where the incentive structure was the most conducive and that the worst collapses happened where there were the most restrictions on people’s ability to redirect capital & resources is completely unsurprising.

      The point is that you need the cheap money/easy credit that only a massive low interest rate/printing spree can provide if you want a bubble anywhere. Otherwise, people just don’t get the money to borrow and spend on anything – let alone $1 Million homes to live in or that 3rd house in the suburbs that you want to “flip”.

      1. Also, I’d really suggest you read Tom Woods’ “Meltdown”, as well as Thomas Sowell’s “The Housing Boom & Bust”… Sowell talks about policy, and Woods talks about the Austrian point of view and interest rates. I haven’t read Johan Norberg’s book, but I think it migt be worth reading too.

    2. The O’Toole piece is worth reading.

      As one of the Anti-Federalists (excuse me, one of the True Federalists) wrote of the “we the people” clause, “Before entering the house I stumble on the threshold.” Right up front, O’Toole says:

      The demand for housing is inelastic: few Americans are willing to live without a home.

      Demand for houses is dependant on the availability of money to pay for the house. Desire may be inelastic, but demand is not.

      Because so much of O’Toole’s argument proceeds from this wrong turn, it becomes noticeable that the piece still doesn’t explain why prices spiked maybe not on every inch of this vast country but in every region.

      Also land use policies cause volatility on the outskirts rather than in urban centers. The Inland Empire, Fairfax County, New Jersey, the East Bay, all experienced bigger relative bubbles and gooier relative busts than the centers of their respective metro areas. That is the way things happen traditionally, if the realtors are telling the truth for once.

      Finally, Houston avoided the bubble? I’m a frayed knot.

      O’Toole’s piece is nuanced, and I won’t say he’s using his one set of factoids (lots of laff-riot comparisons of permitting length and expense in, for example, San Jose and Dallas) to explain more than it can. But I think Joshua Corning, who is an OG and whose comments I always value, is pretty close to doing that.

      1. The part after the colon has ZERO to do with the first.

        Few Americans are willing to live without A home, but many Americans want to live with MORE THAN ONE. Therefore, the willingness to live without a home has nothing to do with elasticity of housing demand.

      2. Demand for houses is dependant on the availability of money to pay for the house. Desire may be inelastic, but demand is not.

        That’s not entirely true either.

        There has to be a policy (governmental or otherwise) that assumes the house as collateral will retain its value.

        It’s more a blind spot: “Housing always increases in value”. THAT is the policy, written or unwritten, that makes the money available.

    3. Demand for houses is dependant on the availability of money to pay for the house. Desire may be inelastic, but demand is not.

      Yes and no.

      Yes, the SIZE of the bubbles varied by region, but NO region went without a bubble.

      Even Detroit. Prices there may have fallen say 2% during “the national housing bubble”, but the bubble kept them from falling 30% during that period.

      1. Yes, the SIZE of the bubbles varied by region, but NO region went without a bubble.

        We are in a recession. One would expect prices to drop. One does not call the drop in home prices in 1979 a collapse of a housing bubble.

        Tim wants to call a 4% drop in prices during the deepest recession since at least 1979 a housing bubble he is a bit over the top.

  30. Central banking is an art

    No it isn’t.

    Central wanking might be, but not central banking.

  31. Alan Greenspan telling consumers to get an adjustable rate mortgage and then raising the interest rates 17 times in a row, never giving the free market a chance to react on top of all the corruption and credit default swaps are what has landed us where we are today. and then instead of letting these criminals fail we bail them out and stick it to main street. Tim Geithner, please adopt me. I am on your side!

  32. Leaving the economy hanging with high interest rates will only cause more down falls. In order for this economy to survive the crisis they need to leave the interest rates alone and focus on the big picture… America’s security. Unfortunately, this will not happen because the treasury will be issuing treasury bill (T-Bills) to the world markets for placement and will indirectly impact rates to go up as T-Bill will offer higher yields to provide desperately needed funds back to the Federal government i.e. 1980, 1981, and 1982; to satisfy the a spiraling deficit. With the lowest interest rates in the last 50 years, backs are shut down for commercial and business lending.

  33. The New ‘Das Kapital’.

    Too many people believe that FREE MARKET ECONOMY and CAPITALISM is one and the same thing, as opposed by COMMUNISM.

    Communism is nothing more than a philosophy originating from a study of the poor living conditions of workers during the industrial revolution.

    Capitalism is nothing more than a monetary system originating from the use of gold and later deposit slips for gold as a means of exchange.

    But Free Market Economy is a natural way of bringing offer and demand in balance that already existed in the time of barter trade.

    Capitalism exploits labour to create added value ?. or so Karl Marx said.

    But let’s face it ?.. The only real existing value in this world is LABOUR! Nothing can be achieved without it. No raw materials can be extracted from the earth without labour ?? No food can be produced ?? No added value can be created?.. No profits can be achieved ?? Nothing! On the other hand ?? CAPITAL has no real value at all. You can’t eat it. In Mugabe’s Zimbabwe, they burn CAPITAL (paper money) because it is cheaper than firewood!

    Contrary to popular believe: Money is TIME! When you earn money, you have given your time in producing something ? in rendering a service of some kind ? in trading something ?.. or whatever ?.. and received money for that! This money allows you to buy TIME from somebody else. You can buy a product that someone created with his time ? a service ?.. you name it. It is always TIME that you buy! Part of the time that you can buy for your money has already been transferred into products. A car waiting to be sold ?.. Food in the supermarket ?? Tools of some kind ?? A house?. But services still to be rendered ?.. products not yet created ?? are still in their basic form of available TIME! So when unemployment is skyrocketing we should be so happy! There is so much TIME available! What richness! What wealth for a nation! But are we happy with high unemployment?

    TIME when it is not consumed loses it’s value. At a rate of 100 % per day. We are used to transfer the time that we are owed into CAPITAL in order to be able to transfer it back into TIME when we want to buy something or invest it. CAPITAL keeps, but TIME doesn’t!

    In order to persuade someone to invest his capital he wants interest or profit of 4 % or more or he hangs on to his capital. In order to persuade someone to invest his time in a period of unemployment you can give that person less than what he needs to survive and he will still sell you his time. Something is better than nothing!

    And that is how capitalism is able to exploit labour to create added value. By transferring time owed into CAPITAL and only buying time back when it can make a profit, allowing TIME or LABOUR to be completely lost when it is thought that no added value can be created with it. High unemployment, poverty and crises are the flaws of CAPITALISM. Not of the FREE MARKET! Without transferring the time that we are owed into CAPITAL and having to consume that time without too much delay we would still have a FREE MARKET ECONOMY, but we would not have CAPITALISM!

    So how can we have a Free Market Economy without the flaws of Capitalism?

    Barter trade? Of course not! We live in the 3rd millennium! Even though we still use a money system from the 1st or 2nd millennium! If CAPITAL or MONEY is to be a means of exchange for TIME, then it should have the same property as TIME! Meaning ? it should lose value when it is not consumed within a certain period, just as TIME does! But how to achieve that?

    Nothing is easier. Let’s look at one possibility: Substitute V(alue) A(dded) T(ax), which is a punishment for transferring labour into added value, by V(alue) D(iminished) T(ax) on money in possession as long as it is not used. A negative interest Tax on money. For that we would have to change cash money into digital money in our bank account. But hey! We pay with pin, credit card, chip, cheque, internet, mobile phone ?.. We are in the 3rd millennium! Substituting VAT by VDT will certainly make us all a lot richer. As TIME or LABOUR is the only real value that exists we cannot accept a monetary system like CAPITALISM that allows it to go to waste.
    Please check http://www.digigeld.webklik.nl

  34. Hi, this David Miller. This is wonderful blog and wonderful information given here. Excellent site, keep up the good work. There is a problem with building to many houses I am a frugal builder and home buyer. Communism is nothing more than a philosophy originating from a study of the poor living conditions of workers during the industrial revolution. Banks are not giving out loans very easily now to people with great credit.

  35. Hi, this David Miller. This is wonderful blog and wonderful information given here. Excellent site, keep up the good work. Thanks for the tips.
    Savings Account Interest

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