When the bubble finally bursts completely, millions of Americans will be
looking for someone to blame. Look for Congress to hold hearings into
subprime lending practices and “predatory” mortgages. We’ll hear a lot
of grandstanding about how unscrupulous lenders took advantage of poor
people, and how rampant speculation caused real estate markets around
the country to overheat. It will be reminiscent of the Enron hearings,
and the message will be explicitly or implicitly the same: free-market
capitalism, left unchecked, leads to greed, fraud, and unethical if not
illegal business practices.
But capitalism is not to
blame for the housing bubble, the Federal Reserve is. Specifically, Fed
intervention in the economy – through the manipulation of interest
rates and the creation of money – caused the artificial boom in
The Fed has roughly
tripled the amount of dollars and credit in circulation just since 1990.
Housing prices have risen dramatically not because of simple supply and
demand, but because the Fed literally created demand by making the cost
of borrowing money artificially cheap. When credit is cheap, individuals
tend to borrow too much and spend recklessly.
This is not to say that
all banks, lenders, and Wall Street firms are blameless. Many of them
are politically connected, and benefited directly from the Fed’s easy
money policies. And some lenders did make fraudulent or unethical loans.
But every cent they loaned was first created by the Fed.