Bernanke: Don't Blame Fed Policy for Housing Bubble

Ben BernankeDon’t blame monetary policy for creating the housing bubble that erupted into the worst financial crisis since the Great Depression, said Federal Reserve Chairman Ben Bernanke in prepared remarks released today.
The debate will likely persist, Bernanke conceded.  
But he said there is “no significant relationship” between the Fed’s monetary policies – primarily keeping interest rates at historic lows – and the rapid rise in housing prices.
Looking ahead, however, Bernanke said monetary policy will have to play a pivotal role if financial system reforms are inadequate.
“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,” Bernanke said.
In a prepared presentation for the American Economic Association meeting in Atlanta, Bernanke went into great detail behind the Fed’s motivations in keeping interest rates low in the period following the recession of 2001, through the middle of the decade.
The Fed manages the federal funds rate, the interest rate at which banks lend to each other, to influence broader financial conditions, and thus the course of the economy, Bernanke said. The target federal funds rate was lowered quickly in response to the 2001 recession, from 6.5 percent in late 2000 to 1.75 percent in December 2001, and to 1 percent in June 2003.
In June 2004, the FOMC began to raise the target rate, reaching 5.25 percent in June 2006 before pausing.
A weak recovery and higher unemployment following the 2001 recession and terrorist attacks, combined with a fear of an “unwelcome decline in inflation” were the primary factors in keeping the rates at the low levels, Bernanke said.
“Some observers have assigned monetary policy a central role in the crisis,” Bernanke said “Specifically, they claim that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices in the United States, a bubble whose inevitable collapse proved a major source of the financial and economic stresses of the past two years.”
Bernanke’s detailed analysis of housing prices and interest rate policies drove him to this conclusion:
“House prices began to rise in the late 1990s, and although the most rapid price increases occurred when short-term interest rates were at their lowest levels, the magnitude of house price gains seems too large to be readily explainable by the stance of monetary policy alone,” the Fed chief said. “Moreover, cross-country evidence shows no significant relationship between monetary policies and the pace of house price increases.”

One thought on “Bernanke: Don't Blame Fed Policy for Housing Bubble

  • January 3, 2010 at 3:38 pm
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    I concur with this analysis. It was the goofy lending practices fomented by Congressman Barney Frank, that really led to the collapse. Numerous individuals were allowed to qualify for homes that had no finacial where-with-all to ever repay the loans. Because the buyers had no teeth in the deal (no down payment)they willingly walked away when the price escalations ceased.

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