Bernanke: Housing’s Boom-Bust was ‘Trigger’ for Crisis

The housing market’s boom – followed by a bust that saw $7 trillion lost in home values – represented the “trigger” of the financial crisis, not necessarily its cause.
This is the latest insight by Federal Reserve Chairman Ben Bernanke on the 2007-2008 crisis that became the Great Recession.
In a speech at a New York conference Friday, Bernanke offered a comparison between the housing bust and the “dot-com” stock market collapse of tech companies more than a decade ago.
The housing bubble led to a 30 percent or so aggregate decline in home prices and has by now eliminated $7 trillion in equity or values.
“However, on closer examination, it is not clear that even the large movements in house prices, in the absence of the underlying weaknesses in our financial system, can account for the magnitude of the crisis,” Bernanke said.
Much of the decline in housing prices has taken place since the most intense phase of the crisis, so the decline in prices since September 2008 is best seen as a result of, not a cause of, the crisis and ensuing recession, he said.
Any theory related to the financial crisis of 2007-2008 that links its “magnitude to the size of the housing bust must also explain why the fall of dot-com stock prices just a few years earlier, which destroyed as much or more paper wealth – more than $8 trillion – resulted in a relatively short and mild recession and no major financial instability.”
In the case of the deeper and more recent crisis, the housing and mortgage markets interacted with deeper vulnerabilities in the financial system, a situation that did not evolve with the dot-com bust
A major vulnerability in the system had to do with “shadow banking,” Bernanke said, which comprises a set of institutions and markets that perform traditional banking functions – “but do so outside, or in ways only loosely linked to, the traditional system of regulated depository institutions.”
“As became apparent during the crisis, a key vulnerability of the system was the heavy reliance of the shadow banking sector, as well as some of the largest global banks, on various forms of short-term wholesale funding, including commercial paper, repos, securities-lending transactions, and interbank loans.”
Read the full text of Bernanke’s speech.

Leave a Reply

Your email address will not be published. Required fields are marked *