Greenspan: Wrong Then, Wrong Now

Some people blame Alan Greenspan’s policy of low interest rates for causing the housing bubble. Why did Greenspan keep interest rates low? “I did not forecast a significant decline” in housing prices, he told Congress yesterday, “because we had never had a significant decline.”

If you fail to look closely at the data, you will come up with the wrong policies. Nationally, we’ve never had a housing bubble. Locally, we had several. But until now, they have been in so few states that they haven’t impacted the national economy.

The above chart shows the ups and downs of two housing bubbles in California, the first peaking in 1980 and the second in about 1990. Hawaii, Oregon, and Vermont also had bubbles at about the same time. By an extraordinary coincidence, these are the only states that had growth-management planning in the 1970s.
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By 1998, more than a dozen states — including Arizona, Florida, much of New England, and New Jersey — had growth-management laws. So when the housing bubble started growing about that time, it affected nearly half of all American housing. Greenspan continued to insist there was no national housing bubble, and he was right. But as Paul Krugman noted in 2005, local bubbles appeared in places that had strict land-use regulation.

Restrictions on housing created shortages that not only made prices go up, they made them more volatile. As the Antiplanner has previously noted, the fact that prices are falling is not an indication of too much supply, but too little.

Low interest rates did not cause the housing bubble, though higher rates might have suppressed it somewhat. Unless we understand what did cause the bubble — growth-management planning — we will adopt the wrong policies and fail to prevent the next one.

Sydney Transit Disaster

Congratulations to New South Wales for showing the world that it, too, can waste a lot of money building ridiculous rail lines. The Australian state’s Labour government had planned to spend $1.4 billion (all figures in this post in Australian dollars) building a 16-mile line from the suburbs of Chatswood to Parramatta. But local residents protested the line’s routing through a park, so planners decided to put the rail line underground, greatly increasing the cost.

The original plan: Parramatta to Chatswood.

The line now under construction from Epping to Chatswood is only about 8 miles long and the cost is nearly $2 billion. (The $2.3 billion cost quoted in the papers apparently includes interest.) The other 8 miles were postponed because they would cost $1.2 billion and add only 15,000 new riders to the system.

Under construction: Epping to Chatswood.

How many new riders will the $2.0 billion segment add? 12,000. So how does that make sense?

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