In spite of my other posts, I'm pretty skeptical of the importance of monetary policy. For starters, it seems like a misnomer, since there's no particularly good reason to believe that the money multiplier is reliable. That is, it seems like monetary policy is based on an exogenous theory of money, while in reality it seems more likely that lending is driven by demand at a particular interest rate -- and while the Fed can set the interest rate, it can't set demand, and in that sense the causality of the money multiplier may very well go the other direction. But even if money is exogenous and monetary policy works, it's presumably even less relevant to asset bubbles, because the interest rate of a loan only matters if you plan on holding it. If the plan is to buy a house and flip it, thus extinguishing the loan quickly, then the rate of the loan doesn't matter. If there's any way in which Greenspan (or the Fed generally) was important, it was that it's supposed to be a regulator for the banking system, and it totally dropped the ball.
... You have a uselessly limited definition of 'monetary policy' if your definition doesn't include regulating the banking system.In spite of my other posts, I'm pretty skeptical of the importance of monetary policy
If there's any way in which Greenspan (or the Fed generally) was important, it was that it's supposed to be a regulator for the banking system
Monetary policy is (allegedly) controlling the size of the money supply as a matter of macroeconomic policy enforcement, but I can see how "..." is a solid refutation of the problems for that viewpoint posed by endogenous theories of money. It turns out, just because something is accepted wisdom, that doesn't make it true. Regarding your link, I'm immediately turned off by anyone who would use the phrase "the grand illusion called money." Money has value for a very good and very tangible reason. Though the fact that it has a testimonial from Ron Paul just makes it sound like even more of a joke.
But does flipping it really extinguish the loan if the purchaser took out a loan to buy it? If the purchaser was able to get a larger loan based on the lower rates, then the low rate helped create the sale (i.e. the house was now worth more than the original owner payed for it, because someone with an equal income can now get a larger mortgage). Now the original owner has more money, and he goes out and gets a larger mortage too, buying a more-expensive home, whose owner, etc. etc.But even if money is exogenous and monetary policy works, it's presumably even less relevant to asset bubbles, because the interest rate of a loan only matters if you plan on holding it. If the plan is to buy a house and flip it, thus extinguishing the loan quickly, then the rate of the loan doesn't matter.
Well, mortgage bubbles in particular tend to be accompanied by mortgage fraud. One of the biggest factors in the global financial crisis was so-called accounting control fraud: executive compensation was (is) based on quarterly revenue, and executives could fraudulently increase quarterly income by issuing a ton of loans with negative expected returns. The bank might go under in five years, but why does the executive care? Then, on the flip side, brokers are paid on commission, so they have strong incentives to make sure that mortgages make it. I point this out to say that neither morals nor "rational self-interest" represented serious constraints on the growth of lending, because the problem with the argument from self-interest is that it's usually considered with respect to the wrong person's interests. Anyway, during the later days of the real estate bubble of the '00s, the focus for particularly bad lending shifted to loans in which banks did not actually verify the applicants' stated income. (This is normally reserved for people who the bank has good reason to believe are actually good for it.) So I suppose the point is, in principle this could represent a higher constraint, but in practice, "where there's a will, there's a way."
I have no doubt that mortgage fraud played a big role. But what I am suggesting is that monetary policy could fuel an asset bubble simply by increasing available credit by pinning down rates. No doubt, relaxed lending and fraud would only exacerbate this, which I'm sure it did.
Yes, I suspect that is possible, but then my theory of asset prices is that people have a bias toward the status quo, and the perception of change ("new information") makes people think prices should change, so they proceed to change prices. So there is a question about how much policy rate changes are just due to this sort of circular reasoning ("something should be happening, so let's do something!") versus actual changes to the availability of credit. That being said, the real skepticism here is whether monetary policy can be used to stop an asset bubble once it's started.