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It seems that the primary qualification needed by
any chairman of the Federal Reserve is the ability to never admit error, no
matter how damning the evidence. During his tenure on the job, Alan Greenspan
set the standard for implausible deniability. But in a speech last weekend in
Atlanta,
current chairman Ben Bernanke did the Maestro one better. In a tortured
academic dissertation, Bernanke explicitly denied any Fed culpability
for inflating the housing bubble and for the financial crisis that
began when it burst. Despite his best efforts, no one seemed particularly
convinced. By taking such an absurd stand, he has destroyed any
credibility he may have had left.
In his presentation to the National Economic Club, Bernanke claimed that
ultra-low interest rates in the early in the Bush years were
appropriate given the conditions at the time, and that
they therefore did not a contribute to the housing
bubble. Instead, he laid blame squarely at the feat of an
"under-regulated" financial sector which had designed and sold
unconventional and exotic mortgage products, such as adjustable-rate and
interest-only mortgages. According to Ben, it was these
irresponsible lenders (who he now hopes to regulate), not low interest
rates, that caused the housing bubble.
There are two huge flaws in this line of reasoning. First, if these
mortgages were such a problem, why didn't the Fed do something to rein in
their use? When given an opportunity to speak about the widespread use of
ARMs in congressional testimony, former chairman Greenspan had nothing but
praise for these products. He claimed these offerings allowed savvy
homebuyers to save money and better manage their personal balance
sheets. At the time that Greenspan made these statements, Bernanke
was serving as a Fed governor. From neither that position nor his
later role as chairman of President Bush's Council of Economic Advisors did
Bernanke ever utter a scornful phrase about the mortgages he now
condemns in hindsight.
The biggest issuers and insurers of ARMs were Fannie Mae and Freddie
Mac. Both of these Government Sponsored Entities (GSE's) had
policies that allowed for borrowers to qualify based solely on their
ability to meet the initial loan payments, not the higher
payments that would eventually kick in. Why didn't the Fed advise Congress to
force the GSE's to adopt more prudent standards? Either they did
not recognize these mortgages as problematic, in which case they are
incompetent, or they did and remained silent, which is worse. In either
case, if they lacked the foresight or political will to prevent this crisis,
how can we expect them to protect us from the next?
Furthermore, is it really possible that Bernanke is so clueless that he does
not see the relationship between the proliferation of ARMs and interest-only
mortgages and the low short-term interest rates that made them so popular? Without
the ultra-low interest rates provided by the Fed, the vast majority
of these problem mortgages never would have been
originated. ARMs and interest-only mortgages existed well before
the housing bubble began; however, it wasn't until the Fed cut rates to
historically low levels in 2002, and held them there through 2005,
that they became so popular.
The only reason so many people were able to overpay
for houses was because of the temporarily low "introductory"
rates. Had the Fed not set interest rates so low, these options would
not have been available, and house prices would have been held in
check. In short, by keeping interest rates too low, the
Fed inflated the housing bubble by enabling banks to issue
mortgages that made overpriced houses seem affordable.
Bernanke also blames lenders for making the false assumption that real estate
prices would always rise. However, he neglects to point out that he made
the very same mistake. While it is true that many lenders did make this
foolish assumption, they did so under the influence of all the cheap money
supplied by the Fed. Had they not made so many trips to the Fed's punch
bowl, they would have exercised much better judgment. However, the Fed
itself can make no such excuse.
As proof that the Fed caused the housing bubble, I offer a commentary that I
wrote in May of 2004 and which was published as an opinion piece in the
Orange County Register.
You can read the entire commentary here.
However, let me reproduce some key quotes:
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That so many are currently opting for ARMs reflects a level of real
estate speculation unparalleled in American history. Homebuyers have been
lured into this foolish choice by... a Fed chairman desperate to keep the
real estate bubble inflating. Unfortunately, the longer the Fed
remains "patient" with regard to raising short-term interest
rates to appropriate levels, the more homeowners that will be lured into
the ARM time bomb.
The real losers in this whole fiasco are likely to be those who did not
even participate in the mania. As over-leveraged borrowers walk away
from properties in which they have no equity, the Fed will most likely
attempt to bail out both debtors and bank depositors (and the government
sponsored enterprises that insured the loans) with the most inflationary
monetary policy ever undertaken in the history of central banking.
The savings of an entire generation will be wiped out, as it will have been
squandered to perpetuate the biggest real estate and consumer debt bubbles
of all time.
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Now if I could have seen that coming as early as May 2004, why
couldn't the Fed? Even with the full benefit of hindsight, Bernanke still
cannot recognize the Fed's mistakes. Of course, as there is a
campaign underway to expand the Fed's regulatory authority, anyone
expecting an honest assessment from its chairman and chief
lobbyist simply does not understand politics.
While denying the obvious, Bernanke is now pursuing an even more reckless
monetary policy than the one that created the housing bubble. The
consequences this time will be even more devastating, and you can take that
to the bank.
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President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach,
CA 92660
Toll-free: 888-377-3722 / Direct:
203-972-9300 Fax: 949-863-7100
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pschiff@europac.net
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