I think that its story of the linkages between our current crisis and Federal Reserve policy is significantly overstated. Its argument about how excessively-low interest rates caused the housing bubble is exaggerated. I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity. And it overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other.
I have no opinion on how much monetary policy influenced the bubble or could have counteracted it. I know economists don’t like to talk about this sort of thing, but if you ask me the biggest influence policymakers had on the bubble wasn’t so much what they did as to an extent what they said. If you think back to 2003-2006, then media coverage of the housing market was largely dominated by a go-go narrative that fit the advertising sales agenda of the real estate sections of newspapers. People also like a feel-good story.
But it’s not just that some people “got it right” about the housing bubble, the debate about the housing bubble wasn’t really languishing in obscurity. There were newspaper articles about the issue, there were blog posts about it, the idea of a bubble was covered in prominent magazines, etc. Throughout this period, Alan Greenspan and Ben Bernanke were extremely famous, very well-known public officials charged with economic policy. If Greenspan had said something like “seems to me that price:rent ratios are totally out-of-whack and bubbly, so even though I’m not convinced there’s anything the Fed can do to pop a bubble in the housing market, I’m going to put my house on the market and start renting while the going is good” I think that would have made a big difference in the common understanding of what was going on.
Instead, he essentially spent this period egging the bubble on, touting ARMs, downplaying the possibility of a national bust, etc. Similarly, Ben Bernanke’s 2006 Economic Report of the President specifically considered and rejected the possibility of a housing bubble.
The point, to my mind, isn’t merely that these guys were wrong. Nor is it that their wrong analysis led to bad policy. It’s that their wrong statements and absence of accurate ones themselves helped egg the bubble on. How many home sales might have gone differently if moderately informed middle class families had said things like “well, Alan Greenspan says you shouldn’t count on your home appreciating in value on a sustained basis?” My guess is that a modicum of leadership would have made a big difference.