Is the low Fed Funds rate to blame?

Consider that the Greenspan Fed maintained a
1.75% Fed fund for 33 months (December 2001 to September 2004),
a 1.25% for 21 months (November 2002 to August 2004), and
lastly, a 1% Fed funds rate for 12+ months, (June 2003 to June

Here is the link.  But no, I don’t side with Austrian Business Cycle Theory in citing loose monetary policy as the main factor in the artificial boom which preceded the crash.  I view the boom as having been fueled by new global wealth, most of all in Asia, and the liquification of that wealth through credit and the desire for additional risk.

Note that if an increase in real wealth fuels the investment boom, consumption can be robust or even go up at the same time as the rise in investment.  Now, in the boom preceding the current bust, was American consumption robust?  Sure.  If the investment boom had been driven mainly by monetary factors, investment would have gone up and consumption would have gone down, as explained here.  (Try a rebuttal here.)

Loose monetary policy did contribute to the bubble.  In that sense I would defend a modified Austrian theory.  But other reasons also suggest that monetary policy was not the main driver.  Money has a much bigger effect on short-term rates than long-term rates.  Even long-term real rates have only mixed predictive power over real economic activity, including investment.  The Austrians have never developed much of a theory of bubbles.  Ideally you would have a good bubble theory, with Austrian-like monetary factors stirring up the bubble even more.  But you can’t get away with pinning so much of the blame on the government, as modern Austrians are wont to do.  "Bubbliness" is a private sector imperfection and relabeling it as "government distorting price signals through monetary policy" doesn’t much change that.


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