US mortgage purchase applications declined dramatically after 2007. While reasons abound for the collapse (e.g., ALT-A lending), the role of the Federal government and The Federal Reserve are rarely discussed. The blame usually falls on commercial banks, investment banks, non-vanilla mortgage products (e.g. pay-option ARMs) and non-bank lenders (like American Century). Not to mention Government Sponsered Enterprises Fannie Mae and Freddie Mac.

But like a chapter out of Ayn Rand’s classis novel “Atlas Shrugged,” it is the Federal  government and The Federal Reserve that so distorted the playing field that the playing field suffered extreme carnage.

Let’s take a look at a broader measure of monetary policy, the M4 Divisia metric produced by The Center For Financial Stability.  M4 is a broaded measure of moneyness than M1 and M2 money supply metrics.  Here is the Center of Financial Stability’s M4 Divisia YoY. Notice the prolonged growth of M4 Divisia YoY from 1996 to 2007 with growth above 5% (and a whopping >11% growth rate in 2001).

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But with a prolonged period of >5% YoY growth in the M4 Divisia money supply metric, we can see that residential mortgage purchase applications naturally followed (with a helpful nudge from the Clinton Administration and HUD with their National Homeownership Strategy: Partners in the American ScDream).

Notice that after The Great Recession, moneyness has returned to generally sub-4% YoY growth. And a corresponding modest growth in residential purchased applications.

How about Greenspan Shrugged or Clinton Shrugged? Or just The Federal Government shrugged?

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