An editorial in the WSJ nails it.
It lays the blame for the housing bubble at the feet of the US Fed.
The original bubble was in housing prices and mortgage-related assets, which the Federal Reserve helped to create with its negative real interest rates from 2002 into 2005. This was Alan Greenspan's tragic mistake, not that the former Fed chief will acknowledge it.
If the Fed practices "inflation-targetting", the index it uses to measure the rate of inflation should perhaps include a stronger dollop of assets to capture these effects in the future.
But then the editorial severely criticizes the Fed for re-inflating the monetary base beginning in August 2007 as the housing bubble began to burst. This re-inflation led to a secondary bubble in the commodities markets:
As for the second bubble, this one began in August 2007 with the onset of the credit panic. This is Ben Bernanke's creation. The Fed chose to confront the credit crunch as if it were mainly a problem of too little liquidity, not fear of insolvency. To that end it flooded the economy with money, while taking short-term interest rates down to 2% from 5.25% in seven months. The panic only got worse, and this September's stampede finally led the Treasury and Fed to address the solvency problem by supplying public capital and numerous guarantees to the financial system.
The Fed's liquidity burst nonetheless sent markets for a 14-month loop ... The Fed created a commodity bubble of record proportions, with oil doing a round trip in a single year from $70 up to $147 and back down to $69 ...
As Congress plumbs the causes of our current mess, the main one is hiding in plain sight: Reckless monetary policy that did so much to create the credit mania and then compounded the felony with a commodity bubble and run on the dollar whose damage is now becoming apparent. The American people intuitively understand what's been done to them, which is why they are so angry. If the next President ignores the monetary roots of our troubles, he is courting the same fate as George W. Bush.
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