Wikinvest Wire

Donald Kohn - just an interested onlooker

Monday, April 20, 2009

Though the former Fed chief is the master at this fine art, current Federal Reserve Vice Chairman Donald Kohn does a pretty good impersonation of an innocent bystander during the inflation and bursting of the most recent asset bubble in this speech from earlier today.

For a number of years earlier in the decade, U.S. economic growth was supported importantly by rapid increases in consumption and housing, which, in turn, were fueled by an extended surge of global credit. Housing demand was propelled, in part, by persistently low long-term interest rates, loose underwriting standards on mortgages, and, for a while, expectations of continuing increases in house prices that resulted in the building of too many houses and the elevation of home prices to unsustainable levels. These same developments fed a surge in consumption through the effects on wealth of rising house prices and through various financial innovations that allowed many households to liquefy their housing wealth. Financial intermediaries were further exposed by generally inadequate compensation for risk and increased leverage. As the housing boom petered out and then reversed, both households and lenders found themselves overextended, developments that led to a mutually reinforcing pullback in spending and lending. The dynamics of this adjustment, which coincided with the collapse of the global credit boom, helped push the U.S. economy into deep recession.

Economic policymakers have moved aggressively to counter the threat to economic stability by, in effect, filling some of the gap in private lending and spending with government lending and spending.
If only there was something they could have done earlier in the decade...


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