Writing the history of a financial crisis can’t be easy, and it’s even harder when that crisis is still unfolding. That’s why this month we’ve invited a team of economic experts for a very special issue of Cato Unbound. Each brings a different perspective on our financial troubles, and, partly because the matter is so far from settled, we’ve decided to give them all equal billing: Lawrence H. White, William K. Black, Casey Mulligan, and J. Bradford DeLong will each write a full‐length essay in a first of its kind roundtable format. The question at hand: What happened?
Prof. White’s essay is available here, and I found the following particularly interesting:
One can’t explain an unusual cluster of errors by citing greed, which is always around, just as one can’t explain a cluster of airplane crashes by citing gravity. Anyway, the greedy aim at profits, not losses.
I’m just old enough to remember how everyone called the 1980s a decade of greed. Then there were the 1990s, also a decade of greed. The 2000s? Greed yet again. (I wish I could invest in this “greed” thing. It never seems to go out of style.)
I also liked the following, which makes one of its most substantive points in the final parenthesis:
As calculated by the Federal Reserve Bank of St. Louis, the Fed from early 2001 until late 2006 pushed the actual federal funds rate well below the estimated rate that would have been consistent with targeting a 2 percent inflation rate for the PCE [Personal Consumption Expenditure] deflator. The gap was especially large—200 basis point or more—from mid‐2003 to mid‐2005. [4]
The excess credit thus created went heavily into real estate. From mid‐2003 to mid‐2007, while the dollar volume of final sales of goods and services was growing at a compounded rate of 5.9 percent per annum, real‐estate loans at commercial banks were (as already noted) growing at 12.26 percent. [5] Credit‐fueled demand both pushed up the sale prices of existing houses and encouraged the construction of new housing on undeveloped land. Because real estate is an especially long‐lived asset, its market value is especially boosted by low interest rates. The housing sector thus exhibited a disproportionate share of the price inflation predicted by the Taylor Rule. (House prices are not, however, included in standard measures of price inflation.)
I understand that it isn’t easy to incorporate housing prices into measures of inflation, and that there is no generally accepted method of doing it. It seems more important than ever, though, to include these prices in some way, if only to let the public know the sort of trouble housing inflation has very likely been causing.