Saturday, January 16, 2010

Did The Fed Really Pop The Dotcom Bubble?

If you look at real and nominal home prices and price to rent ratios, you see that housing started to move above trend about 1997-98. When the Fed burst the dotcom bubble in 2000, housing was already in the early part of a bubble, yet not one of these three home price indicators shows a decline when the dotcom bubble burst.

What tool does the Fed have that allows it to target the dotcom price bubble, but not the house price bubble? Could the two assets have such different price elasticities to some Fed action?

Comparing the two asset prices would seem to support that the Fed's actions did not directly burst the dotcom bubble.

Dotcom cooled because either the Fed affected a part of the economy that hurt the dotcom businesses more, or the dotcom collapse was just a coincidental occurrence and not a cause and effect.

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