WI The Fed raised interest rates in 2005

Supposing Greenspan had decided to respond to concerns of a housing bubble by raising interest rates sometime in 2005. How would the housing market, financial institutions, and the American economy responded?

(This is sort of my second attempt asking this question.)
 
But at that time the Fed's mandate was (and still is) to keep overall, core inflation at a steady and predictable pace. In the early 2000s, the housing bubble coexisted with historically low inflation rates. Greenspan therefore saw no reason to suddenly raise interest rates, since it was believed that boom and bust had been abolished.

And besides, interest rates eventually were gradually raised into 2006 until housing prices peaked.
 
Maybe this is cynical of me, but supposing Kerry had won in 2004?

The economy was booming. People were happy with ever-rising house prices and were using them as free ATMs. Then suddenly a new president claims that because of a possible future mortgage crisis, he will put an end to the party overnight. Unless Kerry was truly selfless there's no way he would have suppressed the bubble and destroy millions of jobs overnight.

That is, unless he quietly orders the FBI to crack down on mortgage fraud and manipulates the media to report on dangerous derivatives. Then he might have convinced Congress to pass regulations on these derivatives by...oh...2007 or so. By which time the bubble was beginning to pop.
 
The economy was booming. People were happy with ever-rising house prices and were using them as free ATMs. Then suddenly a new president claims that because of a possible future mortgage crisis, he will put an end to the party overnight. Unless Kerry was truly selfless there's no way he would have suppressed the bubble and destroy millions of jobs overnight.

Sorry, I was implying Greenspan would find the "exuberance irrational" if it was happening under a Democratic President -- not that Kerry, of all people, would want to pop the bubble under his watch. (Like I said, it may be cynical of me ;))

At any rate, for this thread I'm more concerned with the "what next" than the "why"...
 
Greenspan is still the Maestro?

Sorry, the other thread has all the ideas I would make. Higher interest rates solve one part of the problem, but predatory/stupid loans will be made, Wall Street will make risky bets and not understand the risks, etc. 7%-8% interest rate might be high enough to cause a "growth recession," if we are lucky. Higher rates will certainly pop it sooner, but you risk a recession. Increasing the reserve requirement for banks might make a difference, but I do not know if the investment banks are covered by it. Greenspan could do a mid-meeting 0.5 rate increase, citing bubble conditions. That might cause Wall Street to reconsider its bets. 2 warnings, though. If my last idea backfires, I would expect an Oct 1987 repeat, and 2, some hot shot trader might still try a new derivative to regain the profit. I wonder if this earlier contraction might spark the euro crisis earlier? Last thought, Greenspan has a better reputation, and perhaps Rand as well?:eek:
 
^^ The problem with gradually tightening money is that it has demonstrated to not create the desired market effect as abruptly and dramatically taking action. So Greenspan, if he decides to tighten policy, must do so harshly and drastically to cause the desired effect. The Euro crisis will still occur, but without the epic final years of housing boom in Spain and Ireland, may really be limited to just Greece.
 

Hyperion

Banned
Well for me personally at the time, I'd probably see my monthly interest on my savings account going up. Not a lot, but nice to get a few bucks in before college.
 
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