Despite mountains of evidence showing it to be untrue, the belief persists among many Alan Greenspan critics that the Fed’s low interest rate policies of the early 2000s magically made credit “easy” on the way to a housing boom. This rates prominent mention simply because in his fawning new biography of the former Fed Chairman, The Man Who Knew, Sebastian Mallaby further disproves what was never true. On purpose or maybe unwittingly, Mallaby reveals through his subject’s writings in the 1970s that the interbank borrowing rate (Fed funds rate) targeted by the Federal Reserve has little to do with the health of the housing market.
Mallaby writes that when Greenspan returned from the Gerald Ford administration to his Townsend-Greenspan economic consultancy in 1977, employee Kathryn Eickhoff “had been telling clients that a hot housing market was driving consumer spending: people were taking out second mortgages on their homes and using the proceeds to remodel their kitchens or purchase new cars, turbocharging the economy.” So while Eickhoff’s belief that housing consumption could drive economic growth was as wrongheaded in the 1970s as it was in the 2000s, her research is yet another reminder that the Fed’s low rate policies had little to do with the housing boom of more recent vintage. We know this because the Fed’s funds rate was soaring in the 70s.
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