How the Federal Reserve Burst the Bubble

<p>By denying that the American housing market was artificially inflated, and by keeping interest rates low and encouraging risky mortgage lending, the Federal Reserve contributed significantly to the inevitable bursting of the housing bubble.</p>
September 9, 2007, 7am PDT | Michael Dudley
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"The country is now seeing the beginnings of an unprecedented drop in housing prices. House prices in many formerly hot markets, like Las Vegas, San Diego and Miami, are now falling at double-digit annual rates. Prices are also falling in many other cities, although at a somewhat less rapid pace. For the first time since the depression, the country will be seeing nominal declines in house prices nationwide.

The immediate fallout from this price collapse is the subprime crisis that threatens to throw millions of people out of homes where they can no longer afford the mortgage. The credit markets have also seized up repeatedly due to the fact investors now realize they are holding hundreds of billions of dollars of bad debt, although they are not certain where.

And, of course, this is just the tip of the iceberg. With record supplies of unsold and vacant homes, and demand suddenly curtailed by an absence of credit, there is no way house prices will stop falling anytime soon. Trillions of dollars of housing equity will vanish in the next few years as the bubble deflates and house prices return to trend levels.

Given this picture, it might be expected the folks at the Federal Reserve Board would be taking some heat. After all, it is their job to make sure catastrophic events like housing crashes do not occur. But, it doesn't look like they will pay a price for their mismanagement. At the annual meeting of central bankers last weekend in Jackson Hole, the Fed crew was eagerly explaining the housing bubble was not their fault and there was nothing they could have done to prevent it."

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Published on Wednesday, September 5, 2007 in Common Dreams
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