On January 3rd, US Federal Reserve Chairman Ben S. Bernanke delivered a major speech at the annual meeting of the American Economic Association. In his formal paper, "Monetary Policy and the Housing Bubble," Chairman Bernanke argues that the Fed's monetary policy was not responsible for the U.S. housing bubble. He claims that faulty regulation was the primary culprit.
Chairman Bernanke's claim is a great canard. The Fed is a serial bubble blower. Let's first consider the Fed-generated demand bubbles. The easiest way to do this is to measure the trend rate of growth in nominal final sales to U.S. purchasers and then examine the deviations from that trend. As the accompanying chart shows, nominal final sales grew at a 5.4% annual rate from the first quarter of 1987 through the third quarter of 2009. This reflects a combination of real sales growth of 3% and inflation of 2.4%.
The nominal final sales measure of aggregate demand contains three significant deviations from the trend (demand bubbles). The first followed the October 1987 stock market crash. The second followed the Asian financial crisis and the collapse of the Russian ruble and Long-Term Capital Management in 1998. The last jump in nominal final sales was set off by the Fed's liquidity injection to fend off a false deflation scare in 2002.
The Fed's zigzag pattern is clear: an overreaction to a so-called crisis, resulting in the excessive injection of liquidity (a sales boom), followed by a draining of liquidity and a recession (a sales slump). READ MORE @ CATO
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