Ed Gramlich, a Fed governor who served under former Chairman Alan Greenspan, was prescient about this. He had warned repeatedly about the impact of predatory lending and declining credit standards, and was a noted skeptic of the wealth effect. In a 2002 speech to the International Bond Congress in London, he questioned the wealth effect’s theoretical basis for both stock prices and home values.
The fallout from the credit bubble -- the ongoing deleveraging that is curtailing spending -- is with us to this day and “still dominates the public mood three elections later,” as Bloomberg News reported.
Unfortunately, the Fed seems committed to fight this drag on growth with policy remedies that are based upon what is probably a false economic belief.
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