http://online.wsj.com/article/SB1238...html#printMode

Low interest rates might have made it easier for some people to get a loan but the banks we're making loans that were unsustanable due to govt interference from Congress and the President's Bush and Clinton.

I put 45% of responsibility on Congress

45% on President Bush and Clinton

10% on the FED.

I quoted more but it was (understandably, in hindsight) too much for the greens. I recommend everyone read the link, it's good stuff.

Just want to make it clear that I'm not personally endorsing what remains quoted in the OP.

0% on the people who chose to buy-in to the various available forms of the credit bubble?

During this same period that foreigners were saving the US was cutting its savings rate. For one to conclude that there was a 'glut' of savings you have to look at the total amount, I can't say what the end result would be (don't have that information) but I can say that stating that the supply curve shifted to the right due to China and the ME is sloppy.

None of those people claimed responsibility for the economy and influencing other people's decisions.

Agreed.

However, are you saying then that there is 0% responsibility for the current bubble-smash/re-bubble attempt economy on the borrowers because they did not claim responsibility for the broader economy or influencing other people's decisions?

People who committed fraud and deception shoulder some of the blame, but the majority of the bubble was pumped up by relatively average people taking what was largely conservative advise, the market will be up in 30 years, houses don't decrease in value ect, while the other option of just holding money was a guaranteed loser thanks to the presidents, congress and fed.

I see that this is covered in the article

If this is true it puts to bed the assertion that a glut of savings was responsible.

I had a good deal of exposure to the sub-prime mortgage market during its heyday. I saw more money changing hands in aggressive borrower refinancing, speculation and over-committed home purchases than the "30 year" borrower you allude to. Many of the so-called average borrowers were caught up in appreciated home valuations and "easy" money.

Look, I'm not making the case that this was a borrower-driven catastrophe. I'm just not buying into the premise that the marketplace holds 0% responsibility for contributing their borrowing power to the perfect storm of suppressed interest rates, securitized asset-backed debts, and poor lending standards. For those who just "held" money, or better yet, did not leverage their appreciated assets, they have lost and risked less than those who wanted in on a hot market.

I am going to rephrase some of what I said, and take back some.

The effect of policy by the federal reserve, congress and the president has been to remove the safest investment class from the equation for most people. Holding cash has been a mainstay of the lower economic classes for a long time, it doesn't require savvy or extensive knowledge and guards against con artists. Inflation turns this type of investment from break even to modest gainer into a perennial loser. As such these groups are forced to turn to riskier and more complex investments to ensure their retirement. So I don't blame them for this mess, even the ones who made 'dumb' investments.

They still lost, when you have a situation where virtually everyone loses the people who structure the game that way are to blame.

+1

We were talking about responsibility, not blame. Two different categories of ownership. I was making a case for the prior. On to your point about the need for riskier investment classes for soon-to-be-retirees:

CPI, momentarily foregoing the argument about its comprehensive accuracy, rated at 172.2 in 2000 and rates at 212.93 currently. For those who sat with cash on the sidelines during the time in question, assuming a conservative, 4% money market return, came out approximately 20% ahead of inflation. So, the risk-averse and conservative investors with a capital-protection profile have not lost against inflation. If I am not mistaken, you are alluding to the fact that this class is a nominal % of total investors, and are pointing to the fact that they should have expected better rates of return from traditional equity classes that have collapsed. Either way, portfolios geared towards asset-protection (heavily weighted towards bonds from 2000 on have performed quite well).

Now, I am not arguing that the potential for enormous future inflation will eat at these gains and drag everyone down, but that is another argument entirely. I agree the deck was stacked against anyone who wanted in on the equity and housing markets as of 2000 because of the policies in place. However, I will not give a complete pass to anyone who wanted to take on these risk profiles for the historical anomaly of higher expected returns. Again, some buyers had a little more caveat than others, and there is a degree of personal responsibility that goes along with it.

I don't think we have much fundamental difference beyond how we are defining our terms and what question we are asking. I do want to say this though (and I'm not accusing you of saying this, its just a good opportunity for an important point)

Finding a subset of people who did earn good returns misses the big picture. If Everyone had tried to put their money in a money market those rates would have dropped to zero and then they would have been the big losers. Capitalism and economic growth are supposed to be able to benefit everyone where as the current market set up is very much a guessing game where a handful of approaches work and the rest end up as losers.

Tolbinny, this is the crux of our disagreement. Capitalism isn't supposed to benefit everyone without cause, it is supposed to benefit anyone exhibiting good decision making in their allocation of capital/resources. Looking backward, despite policy and oversight which created the illusion of AAA-rated/10% returns, capitalism still rewarded good decision making. Specifically in the case of my example, this is what has happened to those who spurned historic anomalies in investment classes and properly identified higher risk with higher expected returns. Looking forward, where "the current market set up is very much a guessing game where a handful of approaches work and the rest end up as losers" is no different than looking back. The fundamentals have not changed. Just perception of their relative value has. And, if you think inflation takes too much bread off the plate, then hedge against it.

Also, I was not looking to cherry-pick an investment class to demonstrate this, I specifically was looking to refute your opinion that cash on the sidelines lost value to inflation:

Now, we have gotten way off-topic from the OP/original assignment of responsibility in the creation of a housing bubble. However, your assertions were inherently flawed:

1 - steady, higher-then-historic-average returns is a reasonable assumption of capitalism

2 - even cash in conservative capital-protection lost money to inflation

That said, back to the OP: "Did the Fed Cause the Housing Bubble?" In terms of the 0% responsibility that you said should be assigned to the borrowers in this landscape, do you still contend that borrowers do not share in the irresponsibility of the bubble?

I didn't mean to imply without cause, but the crux of free exchange is that both participants can walk away better off and the crux of economic growth is that there are more goods (using a very broad definition) today than yesterday. The nature of capitalism allows for (but clearly doesn't mandate) the possibility of everyone improving their situation together, human self interest and the ability to learn increase those possibilities into probabilities.

What I wrote was about history and under those assumptions that meant actual holding of cash, not money market funds (which are investment vehicles) that happen to trade like cash for periods of time.

Not my assumption- higher than zero returns is what should be expected of capitalism in the long run (for the vast majority). Steady is in the eye of the beholder.

That was a different poster, I jumped into the fray and put some words in his mouth .

Printing Yuan to pay exporters to maintain a currency hedge is not the same as saving.

Global savings rates declined throughout the 2000s.

When in Doubt, Blame Asia

There might be a Yellow Menace, but it's the cowards trying to blame Asia and Asian savers for Greenspan's, and now Bernanke's, unfolding worldwide funny money unnatural disaster.

And for a thoroughly detailed annihilation of this sort of Fed apologia:

Did the Fed, or Asian Saving Cause the Housing Bubble?

Is their arguement actually that the glut of asian savings lowered the interest rates? Why would it be bad if the market does this as opposed to them printing money? Its kind of a dumb question cause I know the answer is simply they'll put forward any BS to cover their ass, but do they have a justification for this?

As for the first question, the argument is something that lots of/some economists believe. Here are the premises:

- There's supply of credit. The traditional argument is that supply of credit funds comes from one of two places: savings and newly printed money.
- There's a demand for that credit
- the market price of that credit (the interest rate) is more or less dependent on these two variables.

So, if supply increases relative to demand, the interest rate will drop.

If demand increases relative to supply, then the price will go up.

Simple, right?

So, the argument is in the early part of this decade, a sudden increase in foreign savings led to an increase in the supply of credit. How do we know it was savings and not money printing that led to the increase in the supply of credit? Answer, per David Henderson, quoted in the WSJ Symposium:

As for whether or not this is "bad" that the market does it, it may not be. I think the point of Henderson's argument is that you can't blame for the Fed for this, unless you can blame the Fed for the sudden increase foreign savings. Assuming that the empirical reality is that a sudden increase in foreign savings led to low interest rates which fueled the real estate bubble.

I'm not arguing we should accept Henderson's argument that foreign savings really did have a substantial increase prima facie. Neither does Gerald O'Driscoll, Cato Institute fellow and former Federal Reserve Bank of Dallas VP:

Wow. That quote is fantasticly bad. "Compare 2006 to 2001 and ignore everything in between." With slight of hand give the impression that a decrease in the rate of increase of the money supply is not still an increase in the money supply, which of course it is.

From the middle of 2000 until 2003 Alan Greenspan took the Fed Funds rate from nearly 7% to a ridiculously low 1% in 2003, where it stayed for roughly 2 years. From there it increased to the still too low ~5.25% for a year or so before Bernanke took it down in another cliff dive.



The fact that the money supply growth slowed after rates bottomed merely indicates that taking interest rates down to some artificially low but non-zero level can only push so much money before all would-be borrowers are priced in at that rate. You have to keep dropping the rate, otherwise the money spigot shuts itself off for lack of borrowers and eventually brings on the recession.