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Easy Money and Asset Bubbles

  • Written by Syndicated Publisher No Comments Comments
    January 19, 2015

    You’d think that, at some point, central bankers around the the world will collectively wake up and smell the coffee vis-a-vis monetary policy and asset bubbles. A few encouraging signs were seen just today, first from an NBER working paper titled Betting the House in which, despite assurances to the contrary from former Fed Chief Ben Bernanke, there might indeed be a strong link between easy money and asset bubbles:

    We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

    The other quasi-revelation comes from the St. Louis Fed where researchers stumbled across the first housing boom that didn’t require broad participation from homeowners:

    They fail to make a connection between easy money and soaring prices, simply noting:

    The data suggest that this is the first national housing boom in the postwar era that has not been supported by an increased demand for owner-occupied housing. This current episode could solidify the idea that it is possible to have housing booms driven entirely by investors. Therefore, it is no longer clear going forward that the home-ownership rate provides a good predictor of future house prices.

    Clearly, easy money from the Fed fueling demand from said “investors” was a step too far…

    Images: via Flickr (licence attribution)

    About The Author

    As you may have already deduced, this is not your typical financial blog, accompanied by some run-of-the-mill investment newsletter, and I’m not your typical financial writer.

    In fact, I spent my entire working career as an engineer before retiring back in 2007 at the tender young age of 46. Two years prior to that in 2005 I started writing a blog – The Mess That Greenspan Made – mostly just to poke fun at the housing bubble and the policy makers who had led us down that path.

    Details about the investment newsletter and information about the performance of the associated “model portfolio” can be found here and if there are any questions that I can help answer, just send mail to tim@iaconoresearch.com.

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