“That men do not learn very much from the lessons of history is the most important of all the lessons of history.” These are the simple, yet exceedingly relevant for our times, words of the famous English writer, Aldous Huxley. If only Federal Reserve chairman Ben Bernanke would acquaint himself with this quote.
For three years, between 2001 and 2004, in an effort to boost the economy after the 911 terrorist attacks, his predecessor at the Fed, Alan Greenspan, kept the Federal Funds Interest Rate under two percent. As a result, cheap money and low introductory teaser rates fueled the largest housing boom in American history. Then, like all fake boom phases, when interest rates rose, it came to an end. The necessary correction phase started and all the malinvestment of the boom phase was no longer sustainable under higher rates. Foreclosures increased. As housing prices fell back to earth, underwater mortgages and abandoned homes were everywhere. Many still find themselves unemployed and destitute.
Now, instead of letting the market go through a much needed correction after the crisis began, new Federal Reserve chairman Ben Bernanke pursued a policy bent on “stabilizing” the value of assets. Since 2008, Bernanke’s Fed has kept the Federal Funds Interest Rate close to zero percent and it has increased its balance sheet by just under three trillion dollars by purchasing Treasuries and mortgage-backed securities from member banks.
Some economists believe Chairman Bernanke’s policies have created a housing recovery. These economists believe this because they haven’t learned from history, especially recent history.
But, according to David Stockman, the former head of the Office of Management and Budget under Reagan, what Bernanke’s policies have created is simply another housing bubble. He sees a similar combination of artificially low interest rates and speculation producing the current housing boom just like the boom during Greenspan’s tenure.