Easy Money and Asset Bubbles
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You’d think that, at some point, central bankers around the the world will
collectively wake up and smell the coffee vis-a-vis monetary policy and asset
bubbles. A few encouraging signs were seen just today, first from an NBER
working paper titled Betting
the House in which, despite assurances to the contrary from former Fed
Chief Ben Bernanke, there might indeed be a strong link between easy money
and asset bubbles:
We use novel instrumental variable local projection methods to demonstrate
that loose monetary conditions lead to booms in real estate lending and house
prices bubbles; these, in turn, materially heighten the risk of financial
crises. Both effects have become stronger in the postwar era.
The other quasi-revelation comes from the St. Louis Fed where researchers stumbled
across the first housing boom that didn’t require broad participation
from homeowners:
They fail to make a connection between easy money and soaring prices,
simply noting:
The data suggest that this is the first national housing boom in the
postwar era that has not been supported by an increased demand for
owner-occupied housing. This current episode could solidify the idea that it
is possible to have housing booms driven entirely by investors. Therefore, it
is no longer clear going forward that the homeownership rate provides a good
predictor of future house prices.
Clearly, easy money from the Fed fueling demand from said “investors” was
a step too far…
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Tim Iacono is the founder of Iacono Research, a subscription service providing market commentary and investment advisory services specializing in commodity based investing.
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