Once more unto the breach, dear friends, once more.
Having slogged through several years of research on the many and complex causes of the financial crisis, I take it personally when people try to rewrite history and ignore what actually drove the events that led to the collapse.
That is our charge today, in response to the rather perplexing claim that the Federal Reserve caused the crisis — not because former Fed Chairman Alan Greenspan irresponsibly kept rates low for too long, but rather because the Fed raised them.
This is the proposition offered in a New York Times op-ed by David Beckworth of the Mercatus Center and Ramesh Ponnuru of the American Enterprise Institute and a Bloomberg View columnist.
Before we delve into details, a preface: We have spent a good deal of time explaining how and why complex things are easy to misunderstand. There is rarely if ever a single factor that drives complex systems such as the economy or markets; the real world isn’t that neat and simple. As philosopher David Hume once explained, causation is a much more nuanced thing; correlation can be confusing. There also is the issue of some folks who feel compelled tomisrepresent what caused the crisis, as it helps rationalize their own cognitive dissonance.
We and others have discussed this in the context of the movie “The Big Short.” That is the leaping-off point for Beckworth and Ponnuru article.
To make the claim as the authors do that “The bursting of the housing bubble was the primary cause of a financial crisis” is to confuse cause and effect, to ignore a wealth of other well-documented factors,and to marry a straw-man argument with an oversimplified explanation for what happened. Just as the collapse of Lehman Brothers didn’t causethe crisis, neither did the bursting of the housing bubble. Both of these events were the result of many factors in a complex chain. These two events were the result of the crisis, not its main cause.
Instead, the argument Beckworth and Ponnuru make is “that the Federal Reserve caused the crisis by tightening monetary policy in 2008.” They also say that the “housing bust started in early 2006, more than two years before the economic crisis.” Both of these assertions are incorrect, for the seeds of the bust were planted long before. What’s more, the Fed didn’t tighten in 2008; it cut rates seven times.
Continues at Confusion About the Financial Crisis Won’t Die