Greenspan: Fed could not have stopped US housing bubble
Former US Federal Reserve chairman Alan Greenspan has defended his policies against an increasing number of critics who argue they are largely responsible for the current financial and economic crisis. Greenspan, who chaired the US central bank between 1987 and the beginning of 2006, said in today’s Wall Street Journal that keeping the so-called federal-funds rate – or overnight lending rate between banks – at historically low levels between 2001 and 2006 should not be blamed for the credit and housing bubble. According to Greenspan, the glut of savings built up by emerging market economies, particularly China, played a much bigger role than the Federal Reserve. By investing much of the savings into bond markets, the former Fed chairman argues, these economies helped keep long-term interest rates – key to the cost of mortgages for US homeowners – at a dangerously low level.
Greenspan is wrong.
Those of our readers who are familiar with the underlying theory from which LVT emerges will know that the so-called “housing bubble” was a bubble in the price of land titles, and that such bubbles can be prevented by charging a substantial annual tax on the rental value of land. There can then be no bubble. Read Daily Telegraph article here
The Daily Telegraph’s web site has a useful feature of calling up references to related articles, and one of these, dating from last October, is a report that the European Central Bank sees a crisis of ‘enormous proportions’ as Spain creates a mortgage rescue fund… The European Central Bank has dramatically changed its tune over the last twenty-four hours as the credit freeze worsens, acknowledging for the first time that the world faces the gravest crisis since the Great Depression. This availability of such reminders takes away any excuse for forgetting the obvious conclusion to be drawn – that the origin of this crisis is a classic debt-fuelled land price bubble.
It is worth following through these automatic references. Another compares the UK situation with that of the Eurozone countries. It says
“The Bank of England may have averted a catastrophe. If ever there was a time when this country needed its own monetary authorities – acting with wartime urgency – this is the moment… Those nations such as Spain and Ireland that have surrendered policy to a body that is deaf to their pleas and constitutionally obliged to ignore the welfare of their particular societies face crucifixion. Spain’s agony is already well advanced. Industrial output has fallen 24pc. Some 352,000 people have lost their jobs in two months. BBVA expects unemployment to reach 20pc next year, touching 4.5m. Premier Jose Luis Zapatero can do nothing as long as Spain remains in monetary union. He cannot devalue to claw back 30pc in lost labour competitiveness against EMU’s German bloc, or take emergency steps to slow the property crash. In an odd lapse last week – perhaps a slip – he advised Spaniards that the best thing to do in these dark times was to ****… Yes, it is dangerous for the Bank of England to buy up a third of all long-dated gilts. But it would be even more dangerous to allow deflation to run its course in an economy where debt levels have reached such extremes. Debt and deflation are a deadly mix.”
Eurozone under threat
It looks as if the concept of the Eurozone is about to undergo near-destructive testing. We never were convinced about the long-term viability of the project. Had the UK joined the Eurozone from the outset, the low interest rates would have produced an even bigger and more damaging land price bubble than the one the country actually got. At the moment it is anyone’s guess whether the Eurozone will survive, and if it does, how it will look when this crisis comes to a conclusion.
We are, however, sceptical about the likely effectiveness and associated hazards of the Bank of England’s policies of almost-zero interest rates and quantitative easing, and will be examining these in depth in a future article. Our scepticism seems well-justified. From the US today come reports that Democrats in the US Congress are drawing up plans for a second stimulus bill amid fears the first $787 billion package was not big enough to kick start the US economy. Just weeks after Congress approved the largest rescue package in US history, Nancy Pelosi, the speaker of the House of Representatives, said “we have to keep the door open” to another stimulus.
What theories and principles, we should ask, are any of these policies based on?