Query and reply

Ms McArdle asks:

Here’s the problem: if markets are so great, how come the entire system can be brought low by a smallish injection of short-term capital?

Here are the stats on the money supply. The Fed stopped counting M3 (I wonder why . . . ), so let’s look at M3 in solid economic times. At the beginning of 2003, M2 was 5806.1. By the end of 2007, it was 7447.1. That’s an increase of just under 30% – and the increase in M3 would probably have been much higher. Now, you can call this a lot of things, but “a smallish injection” of anything is not one of those things. This wasn’t just some dude who brought down the economy. It was a guy with the power to create money with virtually no limit at will and he did so aggressively. Is it really so hard to believe that such an ability could lead to perverse market outcomes? Further, if you include all the subsidies already working to get too many people into homes, is it really so hard to believe that we might end up with . . . too many people in home?

This is not to say that Tyler Cowen’s suggestion that increasing wealth in Asia had nothing to do with the crisis. But to write of the monetary actions of Greenspan as “smallish” is to be willfully ignorant of what the Fed was doing for the last 7 years.

Update: These charts may be better.

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