Do you blame the housing market on the Fed or the 'glut'?
Krugman and Wells argue that Fannie, Freddie and the Fed are innocent; the big bad global glut fed the boom that led to the crash.
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If you think about it, during the time in question some countries like China saved a lot but other countries, notably the United States, did not save. The savers were balanced by the non-savers. Certainly there was – and still is – global imbalance, but not an overall surplus.Skip to next paragraph
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What do Krugman and Wells say about the lack of evidence of a global glut? They don’t say anything. I suppose it is much easier to pretend no such question exists.
In any case, they write that the Fed could not have done otherwise in the years following the 2001 recession because recovery from that recession was too slow. Similarly, Krugman argues for aggressive policies now on the ground that the current recovery is too slow. Maybe recoveries are hampered by hangovers caused by the Fed’s serial stimulations. Yet more stimulation is like telling someone to have another drink when they wake up with a bad hangover. True, some people will do that, but it’s not really the way to recovery.
Fed chiefs, former and current, have espoused the global glut argument and Alan Greenspan responded to Taylor’s critique. Jerry O’Driscoll showed the problems with Greenspan’s reply.
Krugman and Wells are inclined to present government entities in the best light—they also defend mortgage buyers Fannie Mae and Freddie Mac. They criticize Raghuram Rajan, author of the one of the books they review – Fault Lines: How Hidden Fractures Still Threaten the World Economy – for suggesting that these government-backed giants made mortgage credit easy. That, according to Krugman and Wells, is “a politically motivated myth.”
So, Fannie, Freddie and the Fed are innocent; the big bad global glut fed the boom which led to the crash. If you believe that, you’ll give me a government-backed mortgage for this bridge I’m buying in Brooklyn.
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