Mallaby’s argument that Greenspan should have known that a tighter monetary policy was appropriate in 2004-2005 (if that was in fact the case!) strains credulity. In 2003 the Fed was navigating a deflation scare and a jobless recovery from the 2001 recession—no net payroll jobs were created in the U.S. economy over 2003—which had led the Federal Open Market Committee to cut the fed funds rate to a record-low 1 percent. The FOMC did not stay at that level for long, however; Greenspan began to prepare the ground for a rate increase in January 2004, when the Committee’s language about keeping policy accommodative for a “considerable period” was modified. As Brad DeLong has pointed out, citing the FOMC transcript, at that point Greenspan was far from certain that the rise in housing prices was a nationwide bubble or that it could pose a threat to financial stability. Indeed, much of the increase in housing prices was still to come
Pointer from Tyler Cowen. Read the whole thing. I take Bernanke’s side on this one. Feel free to re-read my earlier post on Mallaby.
Bernake’s defense is very thin and he is basically cherry picking his numbers to support his position, rather than taking the numbers as a whole. Lines like this
“The FOMC would go on to raise the federal funds rate at seventeen consecutive meetings.”
Give very little context to what is a complex discussion. The reader is supposed to take away that monetary policy was “tight(er?)” and since that didn’t prevent the majority of the excesses that even tighter policy wouldn’t have made much difference. This is a borderline dishonest (to be charitable) reading of the data. What did 17 consecutive meetings with a increase in the funds rate look like? An increase from 1% to 5.25% that took place over more than 2 years, compared to the decrease in the Federal Fund rate from Dec 2000 to Dec 2001 where it fell from 6.5% to 1.75% in a 12 month span, and from 5.25% in July 2007 to a hair above 0% in Dec 2008. The Fed was happy to move interest rates down close to twice as quickly as it was willing to move interest rates up. Highlighting the length of time of raising rates is used to obscure the fact that they were raising rates very slowly. Another misleading line
“which had led the Federal Open Market Committee to cut the fed funds rate to a record-low 1 percent. The FOMC did not stay at that level for long, however; Greenspan began to prepare the ground for a rate increase in January 2004,”
Very misleading historically. 1% was a record low and the rate didn’t “stay at that level for very long”, but what is the context for this low rate? The fed Funds rate had been above 3% from the early 60s to 2001, almost 40 years of > 3%, rates then when rates broke 3% in 2001 they stayed below that level for 3.5 years, this is not a short time. If you compare only to the local minimum of 1% then it is easy to frame things as “not as loose as the absolute loosest that we have ever been”, when you zoom out though the Fed was making new 40 year lows in the Funds rate for almost 2 straight years and then held at the bottom for almost another year and then increased rates at roughly half the pace that they had cut them starting in 2000.
As Arnold has said — the Fed can’t quite fine tune the economy, nor the inflation rate, altho there is a huge influence.
The Fed should have known it was a housing bubble, and should have taken steps to kill the bubble sooner, along with preparation for post-bubble stimulus for retraining and adjustment.
Correctly knowing about the bubbles, so as to minimize from Huge to merely big bubble pops is the big crisis job of the Fed.
They should have slowly & clearly read the terms of more MBS offerings and had models about what happens if (/when) the MBS values drop — because the money available for borrowing was based on MBS value as collateral.