Easy Does It?

Here's a chart from the U.S. federal reserve that Paul Krugman mentioned the other day.



The Fed included the chart as evidence that monetary policy wasn't the cause of a U.S. housing bubble. Krugman was pointing out in response that you can't use a national average change in housing prices all that meaningfully for a country like the U.S. since, unlike other countries that had bigger national changes, the U.S. had a mix of high-growth bubbly areas and small-growth no-bubble areas.

As a Canadian, I noted that the growth in housing prices was higher in Canada than the U.S. over the period covered, and that the same logic regarding only part of the country having the big house price changes applied here as well.

But what worried me was something else.

The x axis on the chart is the Taylor Rule residual, or how interest rates, as set by the central bank, varied vs. what a rule-of-thumb known as the Taylor rule would suggest they should be. I'm not going to get into the technical elements of how the Taylor Rule works, the point is that the U.S. Fed used this metric in the chart as a rough measure of how 'easy' monetary policy was over the period. One concern with 'easy' policy is that by keeping interest rates below what they 'should' be, the Central bank might foster an unsustainable credit/asset price bubble that would be followed by a crash.

So starting from the left let's consider the countries that had the 'easiest' policy:

Greece: "Moody's cut Greece's debt to A2 from A1 on Tuesday over soaring deficits, becoming the third major rating agency to downgrade the highly-indebted country's rating this month."

Spain: "The weaker euro economies such as Spain and Greece have been terribly hit by the crisis, and experts blame the euro, at least in part, as European Monetary Union (EMU) members cannot use national monetary policy as a crisis-fighting tool."

Ireland: "How close is Ireland to crisis? Close enough that prominent people are raising the spectre of capital account flight already underway."

"The United States: Aughts were a lost decade for U.S. economy, workers"

So who's in fifth place, behind arguably the 4 countries hardest hit by the global financial crisis? Canada.

But don't worry, it's different here - I hope.