Each of the last three recessions contained elements of extraordinary financial instability. For example, Savings and Loan Institutions (S&L) used federally insured deposits to make ruthless real estate loans in the 1980s. As the Federal Reserve increased its lending rate above 300 base points between March 1988 and March 1989, a property bubble jump, hundreds of hundreds of S&L, fell apart, and the 1990 recession damaged livelihoods.
Not surprisingly, comparable patterns of economic senselessness are found in the late 1990s and again in the mid-2000s. Never before was the marginal debt employed in the late 1990s to participate in dot-com mania. When Greenspan Fed raised interest rates by 200 basis points to contain the stock market's "irrational infidelity", the Internet bubble broke, millions of technical workers lost their jobs, and the recession in 2001 hampered economic well-being.
] Were things really something different when we came to the housing bubble? Banks served unmanned subprime loans to almost anyone with pulse and pen. As the Federal Reserve increased its daily lending rate by more than 400 basis points between the summer of 2004 and the summer of 2006, the housing balloon exploded, the subprime disaster worsened, and the major recession hit hundreds of millions of Americans.
It is easy to see why so many people want the Fed to refrain from raising prices again. When the Fed has launched a hiking campaign recently, bad events have followed.
However, the scores of simple money cheerleaders ignore are the real cause behind the scenes of the catastrophic results. In particular, the Fed's manipulation of lower prices for longer periods makes inflatable stocks, bonds and property values, and promotes a wealth effect. Nevertheless, the same wealth effect is subject to sinister reversal when hyper-inflated property bubbles fail.