August 29, 2007

JACKSON HOLE, WYO. - Before an audience of prominent central bankers, policymakers and economists, Edward Leamer, professor with UCLA Anderson School of Management and director of the UCLA Anderson Forecast, presented his paper "Housing and the Business Cycle" today at the Federal Reserve Bank of Kansas City's annual Economic Symposium.  Leamer was one of five distinguished experts invited to present papers at this year’s Symposium entitled "Housing, Housing Finance, and Monetary Policy."

Diverging from the accepted opinion of most economists and monetary authorities, Leamer argued that the U.S. economy is guided not by a business cycle, but instead by a consumer cycle driven especially by the ups and downs of housing. Examining economic statistics since World War II, Leamer illustrated that weaknesses in housing and consumer durables make a considerable contribution to our country’s economic recessions.

"By neglecting the critical role that housing plays in U.S. recessions, our Federal Reserve has let our recessions be more frequent and more severe then they need to be," said Leamer.  "In particular, the subprime mortgage crisis is a direct consequence of short-term interest rates held too low for too long by the Fed."

Leamer made his presentation following opening remarks delivered by Federal Reserve chairman Ben Bernanke who said it would not be "appropriate ... to protect lenders and investors from the consequences of their financial decisions."   Nonetheless, he did say that "developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy."

Inviting the Fed to do more than just "make us happy," Leamer concluded his paper with a monetary policy to-do list, asking the Fed to: 1) smooth the business cycle (make recessions less frequent, less severe, and more short-lived) 2) keep us working productively (limit the speculative bubbles that absorb our labor and time and that divert savings into low-yielding investments) 3) limit the redistribution of wealth caused by market disruptions (minimize the extent to which turbulence in financial markets causes redistribution of wealth from one group to another) 4) keep our balance sheets accurately reflecting reality (recognize the real assets on which our future GDP depends: factories, equipment, knowledge, and homes).  Please click here to view Edward Leamer’s complete paper (PDF).

About the Federal Reserve Bank of Kansas City’s Economic Symposium
Since 1978, the Federal Reserve Bank of Kansas City has sponsored a symposium on an important economic issue facing the U.S. and world economies. Symposium participants include prominent central bankers, finance ministers, academics, and financial market participants from around the world. The participants convene to discuss the economic issues, implications, and policy options pertaining to the symposium topic. The symposium proceedings include papers, commentary, and discussion. For more information on FRBKC’s annual Economic Symposium, go to:

About UCLA Anderson School of Management
UCLA Anderson School of Management, established in 1935, is regarded among the very best business schools in the world.  UCLA Anderson faculty are ranked #1 in "Intellectual Capital" by BusinessWeek and are renowned for their teaching excellence and research in advancing management thinking.  Each year, UCLA Anderson provides management education to more than 1,600 students enrolled in MBA, Executive MBA, Fully-Employed MBA and doctoral programs, and to more than 2,000 professional managers through executive education programs.  Combining highly selective admissions, varied and innovative learning programs, and a world-wide network of 35,000 alumni, UCLA Anderson develops and prepares global leaders.

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