rssBernanke on the Housing Bubble
Thursday, September 02, 2010 at 6:01 pm
- 30 Comments
Today, Ben Bernanke, the head of the Federal Reserve, testified before the Financial Crisis Inquiry Commission on Too Big to Fail banks and the general financial collapse. (Find Bernanke’s prepared testimony in a PDF here.) But he is getting the most attention for a comment on housing, where he clearly states that monetary policy (including interest rates) was not the primary cause of the housing bubble. And, he says the Fed was not even sure there was a nationwide housing bubble, and therefore could not have tried to pop it.
Even if monetary policy was not a principal cause of the housing bubble, some have argued that the Fed could have stopped the bubble at an earlier stage by more-aggressive interest rate increases. For several reasons, this was not a practical policy option. First, in 2003 or so, when the policy rate was at its lowest level, there was little agreement about whether the increase in housing prices was a bubble or not (or, a popular hypothesis, that there was a bubble but that it was restricted to certain parts of the country). Second, and more important, monetary policy is a blunt tool; raising the general level o f interest rates to manage a single asset price would undoubtedly have had large side effects on other assets and sectors of the economy. In this case, to significantly affect monthly payments and other measures of housing affordability, the FOMC likely would have had to increase interest rates quite sharply, at a time when the recovery was viewed as “jobless” and deflation was perceived as a threat.
That gives me occasion to publish this astonishing chart of the housing bubble posted by Kevin Drum, showing prices remaining stable until about 2003 before heading skyward. (The Federal Reserve started hiking interest rates before housing prices peaked, in June, 2004.)
An interesting paper flagged by Felix Salmon argues that the primary cause of the housing bubble was an over-investment in mortgage-finance products, priced too low because of a misunderstanding of their risk: “The rise of private-label [mortgage-backed securities] exacerbated informational asymmetries between the financial institutions that intermediate mortgage finance and MBS investors. The result was overinvestment in MBS that boosted the financial intermediaries’ profits and enabled borrowers to bid up housing prices.”
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30 Comments
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The result was overinvestment in MBS that boosted the financial intermediaries’ profits and enabled borrowers to bid up housing prices.”
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Comment posted September 3, 2010 @ 4:22 pm
Without a doubt, Ben Bernanke is the biggest idiot on the planet. I am not a trained economist – just a few college courses – and even I knew there was a housing bubble building like a demented clown's balloon. If he could not determine this, then he is unfit for his office, and all the double talk about other factors in the economy that would have been effected is just a smoke screen. With a stable housing market, with reasonable mortgage rates and practices, the construction market would still be working, people would still have ancillary jobs to that market, financial institutions would not have issued, nor would investors have bought, the derivatives backed by the bad mortgages, and we would not have had an economic meltdown that has crippled us now for over two years. Ben Bernanke and his predecessor, Alan Greenspan, should not be let off on this – they should be in jail for complicity in theft by fraud, conspiracy to commit treason, and just plain stupidity! Their policies coupled with their political ambitions and corporate/banking connections have enriched the rich, destroyed the middle class, nearly destroyed the unions, and crippled this nation, while empowering the GOP and Tea Party crowd to the point where any hope we might have had of turning things around have been stopped.
One of the worst mistakes Obama ever made was re-appointed this man to the Fed Chair. I guess when you are really the president of your nation, but the puppet of the Clinton DNC, you do what you are told. Sadly, for the rest of us, we have to live with this failed policy and see it destroy our lives as we do. Thanks, Ben!
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