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Posted by: Michael Mandel on February 11
This is a weird argument. Subprime adjustable-rate mortgages only became popular in the first place because of the irrationally low level of short-term interest rates. The Fed didn’t really sledgehammer the subprime sector, so much as raise interest rates back to where they ought to be.
I have no idea where rates ‘ought to be’. I do think, though, that the Fed raised rates too fast (which is a bit different than what I said in my previous item, that they raised too much). Four percentage points in two years means that they were raising rates faster than the economy could react, keeping in mind that it takes 12-18 months for rate changes to have their full effect.
In retrospect, it’s pretty clear that Greenspan and Bernanke would have been better off raising two percentage points off the bottom, and then slowing down the increases to give borrowers time to adjust. That surely would have led to a better outcome than what we are getting now.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.