Friday, March 19, 2010

Averting the Bubble

Alan Greenspan has plead guilty to the charge of not recognizing the housing bubble and not putting an end to it. This is nonsense. No one can even define what we mean by a bubble, much less recognize and put an end to it. Even the infamous "Tulip Bubble" craze was only recognized as a bubble after the fact.

During a bubble everyone feels that they are being rewarded for their good judgment and good sense. Few, if any, think that they are engaged in some kind of irrational bubble. Indeed, given the tax laws in the US and the (continued) existence of Fannie and Freddie, American citizens rationally speculate on the housing market. Where else can you get tax free capital gains (and deductions for interest expense along the way)?

Alan Greenspan did not cause or even abet the bubble. He did not keep interest rates low (Asian saving rates accomplished that). The bubble, if you can call it that, was pure and simple the result of deliberate government policy in the US to tax subsidize housing and the absurd policies of Fannie and Freddie, spurred on by Barney Frank, Chris Dodd, and other Congressional buffoons.

The Wall Street Journal today has an article pointing out that Canada did not have a bubble in housing, even though the differences, culturally and economically, between Americans and Canadians are not that great. Why? Canada has no Fannie and no Freddie and no tax breaks for housing (and no Barney Frank and no Chris Dodd). The result -- no bubble.

Greenspan and his policies were irrelevant, regardless of what he may think.

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