George Selgin has a post arguing, contra market monetarists, that it is possible that a small deviation of NGDP from trend (an “Intermediate Spending Boom”) was capable of contributing to the housing boom:
A number of recent exchanges between Market Monetarists and their critics, and especially those of their critics associated with the Austrian school, have debated the contribution of excessively easy Fed policy toward the housing boom and bust. The issue boils down to this: can monetary policy really be said to have contributed to the housing boom in light of the fact that the NGDP growth rate during the 2003-2007 period was, as the figure below illustrates, only a percentage point or so above its previous 5 percent trend?
And he puts up this chart:
Market Monetarists tend to answer, “surely not,” while Austrians (and some others, like John Taylor) insist that it is “yes.”
Bill Woolsey contested Selgin´s chart, saying it´s wrong, and put up some of his own construction.
I side with Bill. My charts were constructed differently but the information they convey is the same as Bill´s. Also, as the next chart shows, the “house price boom” predates by several years Selgin´s (and many others including Market Monetarist David Beckworth) view that NGDP growth was “excessive” during 2003-07. In other words, the house price boom was not the “child” of “easy money”.
The two charts below provide evidence for the MM view that the crisis was brought upon us when the Fed allowed NGDP to tank after mid-2008. Observe, in the left hand chart that in 2003-06 NGDP growth rises above the 5.5% trend growth. But that´s the only way you can get NGDP back to the level trend after it had dropped below, and certainly doesn´t mean that “Fed policy was excessively easy” (in fact. it had been “excessively tight” in 2001-02). By the time Bernanke replaced Greenspan, NGDP was essentially back on trend.
Also notice that when NGDP tanks house prices had already taken most of the fall. And NGDP growth has remained consistently far below 5.5% since.
Note: The “trend” is estimated from 1987 to 1997 and projected forward.