Condescending to the markets
Paul Krugman is not impressed with the efforts to deflect financial regulation by pinning the blame for the crisis on government policy. Government, after all, will make mistakes. Markets can't be so fragile that they're unable to bear them.
[There] is actually a very broad problem with all accounts of the crisis that try to exonerate the private sector and place the blame on the government and/or the Fed: none of the proposed evil deeds of policy makers were remotely large enough to cause problems of this magnitude unless markets vastly overreacted. That is, you have to start by assuming wildly dysfunctional financial markets before you can blame the government for the crisis; and if markets are that dysfunctional, who needs the government to create a mess?
This logic applies, as Brad suggests, to all attempts to explain the crisis in terms of excessively low Fed funds rates for a few years. It applies to John Cochrane’s story that financial markets are efficient, but were terrorized by George W. Bush’s scary speech, and John Taylor’s basically similar claim that policy uncertainty in the couple of weeks after Lehman fell did it. It applies to claims that the Community Reinvestment Act and/or Fannie Freddie somehow led to massive bubbles in high-end housing and commercial real estate.
Put it this way: if our financial system is so high-strung, so manic-depressive, that low rates for a few years can inflate a monstrous bubble, while a few discouraging words from high officials can send them into a tailspin, this doesn’t make the case that policy must walk on eggshells, forgoing any attempt to fight prolonged unemployment. Instead, it makes the case for much, much stronger financial regulation.
It's also worth noting that the markets weren't exactly begging the Federal Reserve to lift interest rates or repeal the Community Reinvestment Act. They were pretty happy with the situation in the late '90s and the mid-Aughts, and they leveraged themselves like mad to take advantage of it.
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