Many point the finger at Alan Greenspan and the Fed for allowing the housing boom to go uncontrolled. Dodd-Frank has been passed to try and prevent a financial crisis of the kind we just endured from ever happening again. But it’s interesting that the free market advocates who accused Alan Greenspan of causing, or at least ignoring the housing bubble, now believe the Fed should allow the present housing deflation to run its course. “Price discovery" and the importance of allowing the free market to clear itself are cited as reasons for the Fed to stand aside. But one has to ask why a free market is “good” during a bust, yet “bad” during a boom?


Greenspan argued that it was not the Fed’s job to pop bubbles but the market’s. The Fed’s job is to promote a stable price index and stable growth, nationally. If the Fed should ignore the present decline in housing prices, they should ignore rising housing prices as well, as long as those fluctuations do not interfere with the general price index. It’s a fact that the housing sector is in a deflationary depression. In contrast, the economy as a whole is growing, albeit slowly. And although we’ve been in a deflation when it comes to housing for years, other prices and sectors are fairly stable nationally.


Housing booms and busts are of no concern to the Fed beyond their influence on the economy and the price level as a whole. For the most part, both Greenspan, and now Bernanke, have ignored housing prices, and inflation has been historically low under both regimes.


Many assume the Fed's policies were responsible for the housing bubble. Yet we know now that both the housing boom and busts were a worldwide phenomenon. And it happened despite the varying degrees of easy or tight monetary policy applied by dozens of nations throughout the world, each pursuing divergent interest rate and money supply policies.


Two of the top economists in the country were on CNBC this morning, John Taylor and Steven Roach. They were there to talk about the state of the economy and what they foresee for the future. Instead they spent their time bashing the Greenspan Fed for, in their opinion, causing low interest rates which led to the real estate bubble. Why?


Why go back 10 years to argue a point based on a dubious theory that low interest rates caused a real estate bubble? Why today? And why the emotional involvement? The scientific method of proving a theory requires that there be no contradictory evidence. Yet, there was no real estate bubble during the 10 years of zero interest rates during the Great Depression; and there was no bubble during the 30 years of zero interest rates in Japan; and there is no bubble in housing after 4 years of zero interest rates, today. So, what makes the couple of years of 1% interest rates during the Greenspan years worthy of such emotional fervor? One might question the motives of such Fed bashing, especially in light of the evidence above.



Perhaps the most glaring contradiction of the importance monetary policy supposedly had on the housing boom worldwide is Canada. Walk across the border from the depressed United States and you enter a land where home prices have risen and where there has been no real estate crash or international banking crisis. Why? What is it about Canada's policies that made it immune to the financial contagion and the real estate collapse other nations experienced?


The answer is not interest rates or monetary ease or tightness. Two simple key policies kept Canada out of the crisis. First, Canada didn’t allow its banking system to leverage mortgages excessively. Borrowers were required to foot a 20% down payment, whiles the US and most other nations saw a proliferation of zero down and other minimally secured loans. Second, Canada required its banks to hold the mortgages they originated and thus did not participate in the sub-prime MBS speculation. They were not allowed to use  other people’s money, exclusively, to invest with or speculate.


In the two thousand plus pages of Dodd Frank, all filled with new regulation, there is nothing like the common sense measures which protected Canada. It may be unnecessary at this point anyway, since banks are taking it on themselves to return to such practices voluntarily. And for good reason…a higher capital requirement prevents high leverage financing, reduces speculation, and limits the misallocation of resources. And when the underwriters of mortgages are responsible long-term for their own products they have “skin in the game.” But it’s a valid question to ask why these most basic requirements, which also kept financial institutions in Canada from becoming “too big to fail,” are not part of the new regulation.


What is in the Dodd-Frank bill however will haunt us for years. Greenspan is on record stating that the Dodd-Frank financial reforms could create the “largest regulatory-induced market distortion” the US has seen since the 1971 imposition of wage and price controls. Dodd-Frank and all its repercussions will be visited upon us soon, but its architects will not be around to see the results of their handiwork. They’ve both tendered their resignations.


A Revolution in the Making 


The oil and gas exploration story just keeps getting bigger. As you probably know, American exploration companies have invented horizontal drilling. In Hermosa Beach California there is a proposal to drill offshore, a practice which is currently banned there. The local drilling company is confident it can drill a relatively inconspicuous well just five blocks off the beach that would only be a few feet deeper than the ocean’s floor but extend horizontally for miles just beneath the ocean to where a massive oil field lies untapped. The result would be the creation of a new supply of oil for America and millions of dollars in tax revenues flowing into a city so strapped that it’s laying off teachers, firemen and policemen.


Let’s again contrast American policy to Canada where they are experiencing one of their greatest amount of new employment in 30 years--much of it due to Canada’s booming oil and gas exploration. There is no government stimulus program in Canada, just production. So much production, that in Houston Texas billions are being spent on new infrastructure needed to accept all the Canadian oil ready to be piped in for refining. The Houston boom is a big one, the construction will take at least ten years to complete, and growth should continue there for years thanks to Canada.


The invention of fracking is also causing a boom in many states, and all on private land, making the Federal government’s restrictive leases on Federal land less and less relevant. It is reassuring to witness American innovation and ingenuity once again transcending our inept Federal government’s attempts to control and regulate private enterprise.


And let us not neglect one important difference: where the federal government provides an abundance of government subsidies for all forms of energy companies, there are no subsidies or tax payer dollars that went into research, development, and exploration, in what is becoming the biggest energy revolution of our time. The private sector on both sides of the border has accomplished a true energy revolution without the governments help or need of a government “energy policy.” As always it is the private sector that ends up creating progress.


Paul Nathan