As I posted on Mises.org,

1) How often is the money multiplier on injected funds (i.e., at the margin) really 10, or anywhere near 10? I'm not sure if this is the correct data-series, but it doesn't seem to support the multiplier hypothesis. That said, we all know the housing sector was very over-leveraged, so I'd expect the multiplier to be higher there.

2) I don't believe ABCT has any explanation for why a boom would occur in a specific sector, or why a ponzi-scheme would develop out of asset prices?

3) Blaming so much on the Fed seems unrealistic given the obvious corporate governance failure of many firms. I don't buy that rational expectations totally negates ABCT (or comes close to doing so), but rising rates and falling home prices didn't exactly take a crystal ball to predict. I know Austrians are loath to admit markets can screw up, but corporate governance isn't something designed by markets.

I'm more in the "ABCT predicts subtle economic discoordination during inflation" camp than the "ABCT explains every bubble" camp.
 

Bob,

Your graph comparing mortgages rates to S&P data was pretty compelling for me.
 

@ Grant -
"2) I don't believe ABCT has any explanation for why a boom would occur in a specific sector, or why a ponzi-scheme would develop out of asset prices?"

I think that investors will speculate on areas which will grow, and the Fed gives them the funds to do it. For example, the CRA supports the housing and subprime industry, so it creates a moral hazard that investment in these areas is safe.
 

I don't buy that rational expectations totally negates ABCT (or comes close to doing so), but rising rates and falling home prices didn't exactly take a crystal ball to predict.

Grant,

I think I get what you're saying, but technically the above doesn't make sense. You are saying that the Austrians are wrong to think that markets can be misled by interest rates, but at the same time you think the markets really made a dumb forecasting error? Do you see why that's a little weird?

Come to think of it, you just demonstrated to me a problem with Tyler Cowen's analysis. He rules out ABCT because "nobody in the market would be so stupid as to think Fed wouldn't change interest rates." Then he chides Austrians, "You guys need to realize that the market can be pretty stupid."

To repeat, I think there is a way to state your position in a coherent way, but as-is it seems you are contradicting yourself?
 

Grant,

To clarify, even if you invoke fraud, there were clearly some moronic decisions being made during the housing boom. So for anyone who thinks, "Markets can get pretty dumb sometimes," why is this incompatible with the claim, "The Fed shouldn't set negative real interest rates because this might trigger an unsustainable boom"?

I think in every single housing bubble article I've written (certainly in this and the last one), I have said the Fed is a big factor among others.

I think the Fed caused the dot-com bubble back in 1999-2000. So obviously I am not wedded to a specific sector with ABCT.
 

Dr. Murphy,

I think I get what you're saying as well. I wasn't trying to claim ABCT was incorrect, but simply point out that it, as its commonly presented, is incomplete or possibly not a major cause of recent bubbles. I believed this may be the case because it doesn't connect these moronic decisions to its proposed cause of credit expansion.

However, this paper's abstract says it far better than I can (wish I'd seen it sooner, Googling "Austrian business cycle rational expectations" found it). It seems to argue that credit expansion causes adverse selection in capitalists; I believe this could explain the "you know its a bubble when your barber is giving you stock tips" phenomenon.

Experimental economics has shown that bubbles form with just a randomly selected group of people investing in simple bonds, at least until those people become experienced in the experiment. Obviously this is absent the selection process of capitalists in the real world, so I'm thinking adverse selection (which can turn a middle-class store manager into a house-flipper) may be a more obvious problem than the subtler discoordination caused by a manipulated interest rate.

I'm not sure I can remember a time when Tyler has held a coherent position; he seems to enjoy being obtuse.
 

I enjoyed your analysis of Greenspan's performance and contribution to this mess. One point that seems to have been missed by focusing so much on the mortgage rates is the amount of opportunity for banks and bank-wannabe's to try to make money on the spreads between their borrowing rate (fed funds=really low) and those juicy mortgage rates (by comparison).
Good job.
 

Homebuyers buy based on monthly payment. A monthly payment of $2,000 can support a 30-year, 7% fixed interest mortgage of $300,000. When rates dropped to 5.5%, that same payment could magically support a mortgage balance of $352,000. For the same payment people could pay more - and did! This got the ball rolling and the "greater fools" jumped in. Exotic, pay-option ARM's lowered the minimum payment even more which, again, pushed up mortgage amounts. Alas, the real estate boom had begun!