This short article by Steve Hanke, of Johns Hopkins and Cato, begins,
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%.
These data talk, and the most interesting thing they say is that every 18 years we can expect the culmination of a credit-fueled real estate and ensuing business cycle. This, of course, doesn’t imply that all recessions are preceded by a real estate cycle. It only says that all real estate cycles have spawned economic downturns.
This knowledge has allowed for some prescient forecasts. The prize in that department goes to Prof. Fred Foldvary who wrote in 1997: “the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war.”
For a full treatment of the 18-year real estate cycle, I recommend the following items:
- Fred E. Foldvary. “The Business Cycle: A Georgist-Austrian Synthesis.” American Journal of Economics and Sociology Vol. 56, No. 4, 1997: 521-41.
- Mason Gaffney. After the Crash: Designing a Depression-Free Economy. Ed. Clifford W. Cobb. Chichester, U.K.: Wiley-Blackwell, 2009.
- Phillip J. Anderson. The Secret Life of Real Estate and Banking. London: Shepheard-Walwyn, 2009.
You can read a book-related interview with Mason Gaffney at http://www.masongaffney.org/essays/GAffney_interview_in_Canada_Sun_Life_Financial.pdf. The book is available here. Fred's paper is here. Mason's review of Phil's book is here.