Caroline Baum: Bernanke’s defense of easy money is ivory tower nonsense

| 5 January 2010 20:57

This quote from Caroline Baum sums things up pretty well about the Fed’s complicity in blowing a massive bubble in housing and in stocks before it.

I know Bernanke has given this issue a great deal of thought and devoted the Fed’s resources to finding the correct answer. Still, the defense sounds like something out of an Ivory Tower, divorced from reality.

The real Fed Funds rate was negative from 2002 to 2005, the longest stretch since the 1970s, a decade notable for high inflation and unemployment. The teaser rates lenders offered on ARMs were pretty close to zero when adjusted for inflation.

When you can borrow for free and invest in an asset whose price can only go up (at least that was the perception about home prices), guess what happens? Credit is misallocated. Lending standards decline. Everyone wants in.

It’s not rocket science, is it?  More at the link below.

Source

Bernanke’s Ivory Tower Doesn’t Have a Mortgage: Caroline Baum – Bloomberg

avatar About Edward Harrison

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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1 Comment

  1. avatar Anonymous says:
    7 January 2010 at 20:57

    You got bunch of inflationist in academia, government, and banking. When Paul Volcker jacked up interest rates, politicians wanted him removed. George Bush senior criticized Alan Greenspan for not creating inflation to boost the economy to help his presidency. When Fed creates inflation, mainstream assume it’s a good thing. There is no critical voice against inflation only from a small group, often crowded out by the status quo. Basically you got bunch of speculators in the mainstream you who like quick money. Interest rates down, housing up = good, and that debt is wealth.