Fed Created A Recipe for Disaster in Housing Market
Fed needs to end its excursions into fiscal policy
Yes, there has been no entity more central to inflating the housing bubble and rescuing banks during the crisis than the Federal Reserve.
At the heart of these errors has been a departure from the Fed's mandate of keeping credit and money growth in line with the real economy.
Much is made of the Fed's "dual mandate" of promoting price stability and full employment, but a read of the Fed's responsibilities, in Section 2A of the Federal Reserve Act, requires the Fed to maintain "growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
Encouraging a bubble in the housing market is the exact opposite of the Fed's mandate.
Yet from 2002 to 2005, the real federal funds rate was negative. Paying people to borrow money for three years is a recipe for disaster.
Beyond the Fed's role in creating the housing bubble was its response to the crisis.
The Fed's role as lender of last resort is to provide liquidity to banks experiencing short term financing needs. No degree of liquidity, however, can cover up a firm's insolvency. The basic problem at firms such as
The Fed's purchase of
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