You’d think that, at some point, central bankers around the the world will collectively wake up and smell the coffee vis-a-vis monetary policy and asset bubbles. A few encouraging signs were seen just today, first from an NBER working paper titled Betting the House in which, despite assurances to the contrary from former Fed Chief Ben Bernanke, there might indeed be a strong link between easy money and asset bubbles:
We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.
The other quasi-revelation comes from the St. Louis Fed where researchers stumbled across the first housing boom that didn’t require broad participation from homeowners:
They fail to make a connection between easy money and soaring prices, simply noting:
The data suggest that this is the first national housing boom in the postwar era that has not been supported by an increased demand for owner-occupied housing. This current episode could solidify the idea that it is possible to have housing booms driven entirely by investors. Therefore, it is no longer clear going forward that the homeownership rate provides a good predictor of future house prices.
Clearly, easy money from the Fed fueling demand from said “investors” was a step too far…