First, channeling Greenspan: it wasn't the Fed's fault (and as Henderson comments pithily: suprise!). Not the Fed's fault because (short-term) Fed rates don't affect (long-term) mortgage rates. Henderson again:
So what caused the drop in long-term interest rates? Greenspan blames, well, capitalism. He writes:
[T]he presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition.
In other words, China and others abandoned idiotic political control of markets, and the resulting flood of wealth created needed somewhere to go. It went to invest in US houses. Ergo, the lowering of rates and the rise in values.
"This certainly sounds plausible," says H:
...but why did China invest in my mortgage instead of Google? I’m not an economist, although sometimes I pretend, but it seems like Fed rates, which made T-bills less attractive on the margin, and silly policies about housing, such as forced lending to poor people and guarantees of Fannie and Freddie bonds, made the latter much more attractive. If Chinese investors could only get 2% return on T-bills (guaranteed by the full faith and credit of our government) but could get 8% return on investments in housing (guaranteed by the full faith and credit of our government), then why would they ever choose the former?
And the grand finish:
So I think it is probably unfair to blame the Fed or Mr. Greenspan for the crisis. It was not loose monetary policy alone that led to the state we are in. A combination of factors led to the boom and the bust. We will probably never know exactly what the relative weight of them was in causing the crisis, but they all have one thing in common — bad government policy. Sure the market acted greedily, selfishly, narrowly, and all the other ways that humans act, but that is to be expected in all states of the world. But for bad government policies, including Mr. Greenspan’s loose money policies, we wouldn’t be where we are today.
Whoa, big fella. It seems to me that you have proved just the opposite of what you think you've proven. You've shown that the collapse came about because those nasty Commies abandoned omnicompetent state planning and embraced the free market. His problem with the government is that the government failed to stop it (I am unclear how we factor in Alan Greenspan who, in Henderson's account, appears not to have been part of the government). If Henderson is right, then the obvious solution is to dig up Chairman Mao and restore ourselves to a more blissful time when the dirty Reds did not paralyze us with free-market poison.
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