Hi clo,
Howdie.
I'm maybe a bit more forgiving of economists' predictions than you here. Yes, they got the future wrong. But it's easier to say so in hindsight.
Unpack what you are saying: house prices were in a bubble; they were worried about inflation.
If you include house prices in inflation numbers, which folks have done sometimes, one might properly have concluded there was an issue with over-priced assets in the economy. And the Fed was trying to figure how to address it.
At the same time, they wanted to preserve the credibility of the Federal Reserve in maintaining a sound currency. Perhaps they felt that by keeping a brake on money they could gently deflate the housing bubble. I don't know.
I daresay they might have unleashed inflation if they hadn't continued to combat it. And then we'd be facing a different monster. Once you go down different branches of reality, you don't know how the machine would have functioned.
But the origin of the problem was not with the inflation policy. It was that unregulated banks were accommodating people with weak credit; and they did so because they figured they'd found a way to limit their risk via the securitisation and sale of bundles of mortgages.
They were wrong, of course. Someone should have noticed and nipped the practice in the bud. But in a Republican policy framework, the US diminishes regulation and thinks it is a harm. Dominoes fall when given a push. The financial industry collapsed and the Fed was forced to flush money into the system to keep it operating.
So you get what you vote for.
I don't think the Fed's policy re inflation leading up to the crisis had much of an impact on that. I don't think they should have been more accommodating, inflation-wise. The US government should not have created a permissive, laisser-faire environment. But it did. And the taxpayers, aka the voters, reaped the consequences.
And here we are again, with the same principles which created the mess dressed up as if they are new and presented for election. I don't believe the US population is dumb enough to go down the same road. Sure hope so anyway.
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