chairman Ben Bernanke is back at it again, pointing the crisis finger
at everyone but himself. To be sure there are plenty of congressional clowns
deserving of a Babe Ruth style "big point", but the biggest point
belongs straight at himself.
Please consider Bernanke Blames
Weak Regulation for Financial Crisis.
failure, not lax monetary policy, was responsible for the housing bubble and
subsequent financial crisis of the last decade, Ben S. Bernanke, the Federal
Reserve chairman, said in a speech on Sunday.
“Stronger regulation and supervision aimed at problems with
underwriting practices and lenders’ risk management would have been a
more effective and surgical approach to constraining the housing bubble than
a general increase in interest rates,” Mr. Bernanke, whose nomination
for a second term awaits Senate confirmation, said in remarks to the American
Technical models based on historical trends in United States housing prices
and monetary policy show that home prices rose much faster than interest
rates alone would have predicted, Mr. Bernanke said.
He also argued that trends in other countries demonstrated a “quite
weak” connection between housing price appreciation and monetary
Policy and the Housing Bubble
If you want to wade through 36 pages of self-serving claptrap, please
consider Monetary Policy and
the Housing Bubble by Ben Bernanke.
Monetary Policy, 2002-2006
The aggressive monetary policy response in 2002 and 2003 was motivated by two
principal factors. First, although the recession technically ended in late
2001, the recovery remained quite weak and "jobless" into the
latter part of 2003. Real gross domestic product (GDP), which normally grows
above trend in the early stages of an economic expansion, rose at an average
pace just above 2 percent in 2002 and the first half of 2003, a rate
insufficient to halt continued increases in the unemployment rate, which
peaked above 6 percent in the first half of 2003.
Second, the FOMC's policy response also reflected concerns about a possible
unwelcome decline in inflation. Taking note of the painful experience of
Japan, policymakers worried that the United States might sink into deflation
and that, as one consequence, the FOMC's target interest rate might hit its
zero lower bound, limiting the scope for further monetary accommodation. FOMC
decisions during this period were informed by a strong consensus among
researchers that, when faced with the risk of hitting the zero lower bound,
policymakers should lower rates preemptively, thereby reducing the
probability of ultimately being constrained by the lower bound on the policy
All efforts should be made to strengthen our regulatory system to prevent a
recurrence of the crisis, and to cushion the effects if another crisis
occurs. However, if adequate reforms are not made, or if they are made but
prove insufficient to prevent dangerous buildups of financial risks, we must
remain open to using monetary policy as a supplementary tool for addressing
those risks--proceeding cautiously and always keeping in mind the inherent
difficulties of that approach. Clearly, we still have much to learn about how
best to make monetary policy and to meet threats to financial stability in
this new era. Maintaining flexibility and an open mind will be essential for
successful policymaking as we feel our way forward.
will have to read the full text to see, but amazingly Bernanke is sticking
with his Savings Glut theory as the reason for the housing bubble as
if massive credit expansion in the US and monetary printing in China somehow
constitutes a "savings glut".
Please see Bernanke Blames
Saving Glut For Housing Bubble for a rebuttal
of Bernanke's thesis. Bear in mind it is absolutely impossible to have too
Also bear in mind that "Two weeks into the job, Bernanke testified
before Congress that it was a positive that the nation's homeownership rate
had reached nearly 70 percent, in part because of subprime loans."
(See Anatomy of a
Meltdown for details).
Now Bernanke blames inadequate subprime regulation for the housing bubble.
Bernanke also takes refuge in the Taylor Rule although there is considerable
disagreement over what it says. My take is the Taylor Rule is fatally flawed
because it fails to take into consideration housing prices (asset prices in
Watch what happens when the Case-Shiller Housing Index is substituted for OER
in the CPI.
Case Shiller CPI vs. CPI-U
click on chart for sharper image
The above is from What's the Real
The Fed could have and should have acted to rein in property bubbles, but
Bernanke is so dense he could not even see there was a property bubble.
Instead, Bernanke blames lack of regulation after initially praising the
housing boom and subprime lending.
Fed Is The "Great Enabler"
Credit bubbles have their foundation in loose monetary policy that makes
borrowing appear attractive. Those bubbles may manifest in the form of stock
market bubbles as in the Nasdaq in 1997-2000 or housing in 2004-2007. Indeed
the Fed is the "Great Enabler" of bubbles.
Just because bubbles do not form in the same way at the same time everywhere
on the planet does not absolve the Fed from guilt.
Bernanke Incapable Of Learning
Bernanke has proven over time to be incapable of learning anything. He sticks
with his theories no matter how flawed they are.
is a paragraph that proves it:
there any role for monetary policy in addressing bubbles? Economists have
pointed out the practical problems with using monetary policy to pop asset
price bubbles, and many of these were illustrated by the recent episode.
Although the house price bubble appears obvious in retrospect--all bubbles
appear obvious in retrospect--in its earlier stages, economists differed
considerably about whether the increase in house prices was sustainable; or,
if it was a bubble, whether the bubble was national or confined to a few
local markets. Monetary policy is also a blunt tool, and interest rate
increases in 2003 or 2004 sufficient to constrain the bubble could have
seriously weakened the economy at just the time when the recovery from the
previous recession was becoming established.
Any economist who
could not see there was housing bubble brewing is straight up incompetent.
That fact alone makes Bernanke incompetent. If the rest of the Fed could not
see it, they are incompetent as well.
Moreover, in spite of the enormous crash we just went through, Bernanke is
spouting nonsense about what might have happened if the Fed would have acted
sooner in 2002 or 2003. How much damage does it take for Bernanke to admit
the Fed blew it?
It is galling to read his self-serving platitudes.
If the Fed is so worried about using "blunt tools" then why is that
worry so freaking asymmetric? Where was the concern in 1999 when Greenspan
slashed rates over a ridiculous Y2K scare?
Where was the worry in 2002, 2003, 2004, 2005, 2006, or 2007?
Note how easily "blunt instrument" worries go out the window when
there is a crisis or even perceived crisis. However, there is never a worry
over the damage caused by holding rates too low, too long.
Bernanke, like Greenspan likes to blow bubbles. Bernanke, like Greenspan
likes to blame others for his mistakes.
Bernanke's Magic Mirror
Without saying so directly, Bernanke just looked straight into the mirror,
and pointed his finger not at himself, but rather at a reflection of Barney
Frank for Congress' failure to regulate.
To be sure Fannie Mae and Freddie Mac made the problem much worse and we can
thank Barney Frank in particular and Congress in general for that. We can
also thank Barney Frank for countless other affordable housing schemes that
made matters worse. Year in, year out, Barney Frank was one of the biggest
congressional contributors to the mess.
Barney Frank surely deserves the finger, but not from hypocrites like
Bernanke who fail to see their own bigger role in cresting this mess.
And so, with the help of Bernanke's magic mirror, this is the biggest case
yet of the pot pointing the finger at the kettle, calling the kettle black.
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