Friday, March 29, 2019

You can't solve a housing bubble with tight money, but you can cause a crisis

Here is a brief I wrote that Mercatus recently posted.  I don't think I've posted it here yet:

The gist:
But note that while the consumption of these newly wealthy real estate owners was inflationary, there is little that monetary policy could have done to change that. In other words, they were using newfound wealth to claim an additional 1.3 percent of GDP for their own consumption, according to Mian and Sufi. That claim on current consumption would remain whether the Fed produced 10 percent inflation or 2 percent deflation. In fact, as the United States discovered in the end, the only way for monetary policy to affect that claim on current consumption would be to allow disruptions in capital markets to become so severe that these rentiers would not be able to access their wealth. The future rental value of their homes has not changed. That future rental value is a product of high demand for living in cities with restricted supply of housing. Monetary policy can’t fix that. It didn’t fix it. Rents in the Closed Access cities are at least as high as anyone might have expected them to be in 2005. The only thing the housing bust accomplished was to prevent the value of those future rents from being fully capitalized into home prices after 2007.

If, before the housing bust became catastrophic, monetary policy within a functional range could not change the ability of these rentiers to claim more current production, then what economic adjustments must happen to satisfy their new consumption demands? If these rentiers were claiming 1.3 percent of additional GDP, where was it going to come from? If they were increasing their current consumption but not their current production, the gap must be met somewhere. Either other Americans would have to reduce their consumption by 1.3 percent of GDP, or an additional 1.3 percent of GDP would need to be imported, or some combination thereof. That had to happen regardless of the stance of the Fed.


  1. That future rental value is a product of high demand for living in cities with restricted supply of housing.--Kevin Erdmann

    This is the crux of the matter. But not a polite topic of discussion, even in libertarian blogs.

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