Daniel Davies blogged way back in 2002 that the Fed’s most likely approach to boosting economic growth was to facilitate the creation of a housing price bubble:
Cleverer readers at this point will be formulating an objection. The objection goes along the lines of:
“Yeah, yeah, laughing boy, but what happens when the housing bubble bursts then?”
Which is a damn good question to ask, particularly since the official policy of the Federal Reserve appears to be “hmmm yeh, never thought of that, I suppose we’d be kind of fucked”. Looks like it falls to me to come to their aid, with a solution that smacks of genius.
For all the back-and-forth bluster about Fannie Mae, regulation, “Wall Street greed,” etc. there seems to me to have been remarkably little focus on policymakers decision-making with regard to this issue. One reason there hasn’t been a ton of focus on it is that a lot of smart, well-informed people saw this risk and thought the Fed was right to basically ignore it. But the very fact that the Fed had — or at least was widely thought to have had — good reasons to behave in this manner is all the more reason to shine some scrutiny. Since nobody ever says “my plan is to be corrupt and incompetent” there’s relatively little value in just saying over and over again that corrupt and inept public officials are undesirable. We do, by contrast, need to talk about how and why well-regarded public officials wound up making serious mistakes. There are, presumably, lessons to be learned here.
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