The Wall Street Journal today published an editorial, “The House the Fed Built” (subscription required), echoing the interpretation of recent Fed history I posted a couple weeks ago:
This is the housing market the Federal Reserve built. That is to say, the current slump in sales, new construction and prices is the aftermath of the astonishing and unsustainable housing boom that began in 2002.
… the biggest single cause [of the housing boom] was Federal Reserve policy in the wake of September 11 and the collapse of the dot-com bubble. With business investment and confidence imploding, the Fed made a bet on the consumer to keep the economy afloat. Former Chairman Alan Greenspan and his mates drove short term interest rates down to 1% and kept them there for a remarkable 12 months. Even when the Fed started to move rates up again, it did so at a slow and too deliberate pace.
The strategy worked in the early going, as the housing market remained strong and the mighty American consumer kept on spending despite terrorism fears, a war and weak job creation in the early years of the decade. The 2001 recession was one of the mildest on record. The trouble arose as the Fed maintained its easy money policy into 2004 and 2005….
One result is what now looks to have been a classic asset inflation in housing values. Mr. Greenspan never got around to ussing the world ‘bubble’ himself, preferring the more eleganet ‘a little froth’. But that’s about as close as any Fed chief gets to conceding a mistake.
This speculative buying was bound to break as the Fed eventually corrected its easy money mistake. The current slump is in part the product of that correction, and it seems likely to continue for some time as the Fed’s interest rate increases have an impact. For many Americans whose monthly mortgage payments are now rising, or who still hope to sell at last year’s prices, this may be painful.