Libertas

After explaining the preceding four culprits: 1) Fannie Mae and Freddie Mac, 2) The Community Reinvestment Act and affirmative action in lending, 3) The government’s artificial stimulus to speculation, and 4) The “pro-ownership” tax code, Dr. Woods gets to the major culprit, the Federal Reserve and artificially cheap credit. The previous four culprits could not account for the size of the housing bubble or the depth of the crash. The housing boom and bust is an example of how business cycles occur. Many believe that business cycles just happen, but as Professor Woods points out, that “let’s government and its central bank off the hook.”

The Business Cycle

The government’s manipulation of the money supply and credit moves the economy into an unsustainable boom that eventually ends with a bust. So too, when the Federal Reserve lowers interest rates the money supply increases. This encourages a boom in production of long-term projects, such as: “raw materials, construction, and capital goods in general.” The lowering of interest rates made possible the boom in construction and real estate. This boom was not based on real demand, preferences, or actual savings but was instead artificial. Economic indicators were skewed. Resources for real consumer demand were directed elsewhere to projects the economy could not sustain. Resources to complete the projects did not exist, nor did sufficient consumers to purchase the finished products. There simply were not enough people who could afford half-million-dollar homes. Anticipated prices had to be lowered. The bust has arrived.

The Money Supply

After 11 September, Federal Reserve Chairman Alan Greenspan tried to kick start the economy by increasing the money supply to lower interests rates. He lowered the target federal fund rate (the rate banks lend to each other overnight) to one percent from June 2003 to June 2004. In order to do this he had to increase the money supply. Between 2000 and 2007 more dollars were created  than the rest of the republic’s history!

Most of this new money ended up in the housing market. With the artificially lax lending standards, excessive home purchases seemed like a good idea. The Fed encouraged the GSEs – Fannie Mae, Ginnie Mae, and Freddie Mac – and the Federal Housing Administration to borrow and lend like never before. The rush to lower lending standards and the monopoly privileges of the semi-governmental agencies

Who gave them the alcohol?

Fannnie Mae and Freddie Mac did play a role in sending the newly created money to the housing market, but the FED created the money.

As Peter Schiff quipped after President Bush described Wall Street as drunk with greed, “Yes, but who gave them the alcohol?”

Based on Meldown by Thomas E. Woods Jr.

Recommended:

The Creature From Jekyll Island by G. Edward Griffin

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