It is far too easy to be a Monday morning quarterback in regards to Fed policy and its role in igniting the financial crisis of 2008-2010, yet economists and pundits nevertheless look to the Fed as an easy target for the deleterious recession. One of the expected effects of monetary easing through open market operations of bond purchases, low Fed funds rates, and low discount rates is that credit in the banking system has a mellifluous flow which allows for greater lending to business and consumers. It is not surprising then that mortgage lending boomed in the years 2000-2004 with Fed funds rate declining throughout the period and mortgage rates at multi-decade lows. What is surprising however is the extent to which housing values skyrocketed from 2000-2007?
"From 2000 through 2006, national home prices rose by 88.7%, far more than the 17.5% gain in the consumer price index or the paltry 1% rise in median household income" (Siegel, J. October 27, 2009).
While low rates certainly did contribute to the boom in housing, the greater cause of the home price bubble growth and implosion which the country is still feeling the effects of, was Freddie, Fannie, low underwriting standards, NINJA products, and no down payments. The housing bubble burst in 2007 some three years after the Fed started raising the Fed funds rate; as such the logic of economists such as John Taylor is confusing at
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