Boom, Bust, and Recovery in the World Economy

NEW YORK – This global economic crisis will go down in history as Greenspan’s Folly. This is a crisis made mainly by the United States Federal Reserve Board during the period of easy money and financial deregulation from the mid-1990’s until today.

This easy-money policy, backed by regulators who failed to regulate, created unprecedented housing and consumer credit bubbles in the US and other countries, notably those that shared America’s policy orientation. The bubble has now burst, and these economies are heading into a steep recession.

At the core of the crisis was the run-up in housing and stock prices, which were way out of line with historical benchmarks. Greenspan stoked two bubbles – the Internet bubble of 1998-2001 and the subsequent housing bubble that is now bursting. In both cases, increases in asset values led US households to think that they had become vastly wealthier, tempting them into a massive increase in their borrowing and spending – for houses, automobiles, and other consumer durables.

Financial markets were eager to lend to these households, in part because the credit markets were deregulated, which served as an invitation to reckless lending. Because of the boom in housing and stock market prices, US household net wealth increased by around $18 trillion during 1996-2006. The rise in consumption based on this wealth in turn raised house prices further, convincing households and lenders to ratchet up the bubble another notch.