Hat tip to Arnold Kling for pointing out the return of Scott Sumner to the blogosphere in the form of his contribution to the ongoing food fight over the role of the GSEs (the public-private hybrids FNMA AKA Fannie Mae and the Federal Home Loan Mortgage Corporation AKA Freddie Mac) in creating the financial crisis. Why food fight? See this post from Tyler Cowen for a flavor of the argument, esp. see the appearance of prominent financial blogger Barry Ritholtz in the comments of Tyler’s post, chiding Tyler for having gone over to the Dark Side.
There’s lots of good insight in Dr. Sumner’s post and I commend it to your attention. See especially the first two graphs in the post, the first of housing starts per million population and the second of bank losses, real GDP, and CPI cost of living. Of the second Dr. Sumner writes:
I see three separate crises. A “misallocation of resources into housing crisis,” a “federal bailout of banks crisis,” and a high unemployment crisis. Who’s to blame for each?
followed by his interpretations.
I don’t have a great deal to add to this but I’ll supply a few minor observations. First, the market for housing has multiple different components and the components behave differently. Among these components are buy and hold (people who buy houses and live in them more than five years), hybrid owner/speculators (people who buy houses, live in them for a shorter period, and then move on), and speculators (those who buy houses to resell them for a profit). The long period, illustrated in the first chart, of housing start increases without a serious decline, undoubtedly encouraged a lot of people to go into the second two classifications. Some, maybe many, of those have been wrung out by the decline in housing prices and the increased difficulty in securing credit.
I think the most likely way to interpret that graph is that interest rates stayed too low for too long, a signal failure of policy on the part of the Fed.
I don’t really have a dog in the GSE fight. I think there are plenty of reasons to dislike the GSEs, corruption being the greatest. However, between the two warring camps (GSEs caused the financial crisis/no they didn’t) those who take the former position have yet to make the case that the GSEs were both necessary and sufficient for the financial crisis. IMO there’s a better case that Chinese trade policy coupled with Chinese monetary policy were both the necessary and sufficient for the crisis, given human nature.
At any rate I think that the problems with our economy go back much, much farther than the last ten years and the financial crisis, like an injury to the body, has revealed weaknesses that were there all along.