Hard Truths About Easy Money

Exactly a decade ago, several asset prices—most notably home prices—were at new heights and rising. The unemployment rate was down to 4.7% and falling—a level hardly ever seen since the 1960s. Although the Federal Reserve pushed the federal-funds rate from 2004 to 2006 into the upper reaches of the normal range—around 5.25%—it declined to push the rate to the abnormally high levels used to contain the Reagan boom of the late ’80s and puncture the internet bubble of 2000. What were they thinking? Then-Fed Chairman Alan Greenspan took the steadiness of inflation as a sign that the prevailing unemployment rate was sustainable or that market forces would gradually drive it to whatever the sustainable level might be. His successor in 2006, Ben Bernanke, had newfound confidence in the Fed’s judgment. He and MIT economist Olivier Blanchard crowed at a 2005 conference in Boston that monetary policy had become a science: When money warrants tightening or loosening, experts will know it and act.