Is the Fed able to identify housing bubbles?

Paul Krugman brings up a very troubling point. The Federal Reserve apparently doesn’t have the theoretical tools needed to have identified the housing bubble. Krugman explains the distinction between “Flatland” and the “Zoned Zone,” showing that one type of land use was vulnerable to bubbles and the other wasn’t. He produces a chart comparing Los Angeles (A Zoned Zone because it has no room to expand, therefore a rise in demand for houses leads only to higher prices) and Atlanta (Flatland because it can just keep expanding in response to increased demand for housing) and demonstrates that Los Angeles had a bubble that began in late 2001 and started collapsing in early 2007. The Fed Chairman Ben Bernanke was using charts that didn’t recognize any distinction between Flatland and the Zoned Zone, therefore, he was incapable of recognizing either that a bubble had formed or that it was collapsing.

So I dunno, seems Dean Baker’s constant amazement that no one appears to have recognized the housing bubble may have some reason for it other than just incomprehensible, blind stupidity. Not that “We were using the wrong chart” is much of an excuse for losing several trillion dollars in housing wealth.

Krugman also shows another chart demonstrating that those who blame Fannie/Freddie/Community Reinvestment for the housing bubble or those blaming general predatory lending are both missing the larger picture. The housing bubble was a broad-based phenomenon.

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