Regulation came too late to stop housing bubble, says Bernanke
The Financial Express, January 5, 2010, Page 18
Bloomberg
Federal Reserve chairman Ben S Bernanke said low central bank interest rates didn’t cause the housing bubble of the past decade and that better regulation would have been more effective in curbing the boom.
“The best response to the housing bubble would have been regulatory, rather than monetary,” Bernanke said on Sunday in remarks to the American Economic Association’s annual meeting in Atlanta. The Fed’s efforts to constrain the bubble were “too late or were insufficient,” which means that regulatory actions “must be better and smarter,” he said.
Bernanke said the Fed is improving supervision of banks and has strengthened measures to protect consumers of financial products. Senate Banking Committee chairman Christopher Dodd, who backs Bernanke for a second term, has called the Fed’s oversight of bank lending before the crisis an “abysmal failure.” Dodd proposes stripping the Fed and other agencies of bank supervision powers and moving them to a new regulator.
Scholars such as Allan Meltzer, a historian of the central bank, have criticised the Fed for helping fuel the housing boom by keeping interest rates too low for too long. The bursting of the housing bubble led to the worst recession since the Great Depression and the loss of more than 7 million US jobs.
“It sounds a little bit like a mea culpa,” said Randall Wray, an economics professor at the University of Missouri in Kansas City, who was in Atlanta and didn’t attend Bernanke’s speech. “The Fed played a role by promoting the most dangerous financial innovations used by institutions to fuel the housing bubble.”
Senator Richard Shelby of Alabama, the senior Republican on the Banking Committee, has said Bernanke failed to anticipate the crisis that led to Fed-backed bailouts of financial firms including Citigroup Inc. and American International Group Inc and doesn’t deserve a second term as Fed chief.
Shelby, at a Dec 17 committee vote on Bernanke’s nomination to a second four-year term starting next month, said the former Princeton University professor “missed clear signals” when he was a Fed governor from 2002 until 2005. Bernanke still must be approved by the full Senate. Bernanke didn’t discuss the outlook for the US economy or Fed monetary policy in Sunday’s speech.
Bernanke said increased use of variable-rate and interest-only mortgages, and the “associated decline of underwriting standards,” were more responsible for the bubble than low rates.
The Financial Express, January 5, 2010, Page 18
Bloomberg
Federal Reserve chairman Ben S Bernanke said low central bank interest rates didn’t cause the housing bubble of the past decade and that better regulation would have been more effective in curbing the boom.
“The best response to the housing bubble would have been regulatory, rather than monetary,” Bernanke said on Sunday in remarks to the American Economic Association’s annual meeting in Atlanta. The Fed’s efforts to constrain the bubble were “too late or were insufficient,” which means that regulatory actions “must be better and smarter,” he said.
Bernanke said the Fed is improving supervision of banks and has strengthened measures to protect consumers of financial products. Senate Banking Committee chairman Christopher Dodd, who backs Bernanke for a second term, has called the Fed’s oversight of bank lending before the crisis an “abysmal failure.” Dodd proposes stripping the Fed and other agencies of bank supervision powers and moving them to a new regulator.
Scholars such as Allan Meltzer, a historian of the central bank, have criticised the Fed for helping fuel the housing boom by keeping interest rates too low for too long. The bursting of the housing bubble led to the worst recession since the Great Depression and the loss of more than 7 million US jobs.
“It sounds a little bit like a mea culpa,” said Randall Wray, an economics professor at the University of Missouri in Kansas City, who was in Atlanta and didn’t attend Bernanke’s speech. “The Fed played a role by promoting the most dangerous financial innovations used by institutions to fuel the housing bubble.”
Senator Richard Shelby of Alabama, the senior Republican on the Banking Committee, has said Bernanke failed to anticipate the crisis that led to Fed-backed bailouts of financial firms including Citigroup Inc. and American International Group Inc and doesn’t deserve a second term as Fed chief.
Shelby, at a Dec 17 committee vote on Bernanke’s nomination to a second four-year term starting next month, said the former Princeton University professor “missed clear signals” when he was a Fed governor from 2002 until 2005. Bernanke still must be approved by the full Senate. Bernanke didn’t discuss the outlook for the US economy or Fed monetary policy in Sunday’s speech.
Bernanke said increased use of variable-rate and interest-only mortgages, and the “associated decline of underwriting standards,” were more responsible for the bubble than low rates.
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