Bernanke Denies Fed’s Role in the Housing Bubble – Huh?


Bernanke Denies Fed’s Role in the Housing Bubble – Huh?

This article was originally published in Confounded Interest

Fed Chair Ben Bernanke is giving a series of lectures on The Fed. Yesterday, he opined that The Fed’s policies had nothing to do with the housing bubble. The Wall Street Journal has a nice review of his lecture today. And here are The Chairman’s slides.


Here is a chart of home prices (blue line) and the Fed Funds Target rate (orange line).

In 2001-2004, The Fed rapidly lowered the Fed Funds Target rate and at the same time the housing market started surging.

As the economy improved (and housing was surging), The Fed started raising the Fed Funds Rate rapidly over 2004-2006. But notice that housing prices still surged upwards.

Finally, The Fed leveled off their Fed Funds Rate in 2006 through late 2007. And at the same time, house prices had stabilized. In The Fed’s mind, the economy was stable (unemployment was low, house prices no longer surging, capacity utilization was strong).

Then … house prices began to fall in 2007. The Fed began cutting The Fed Funds Target quickly over 2007-2008. But this time it was different. While housing (and the economy) responded with great vigor to Fed monetary policy, the economy (and housing) was not so robust the second time around.

It looks to me that The Fed was WILDLY successful in stimulating the economy and housing market in the early 2000s, but have run out of ammo with recent monetary policy.

If you read the overheads (or listen to Bernanke’s lecture), you will see that he blames the bubble on 1) euphoria of house price growth and 2) lax underwriting standards on mortgages and new exotic mortgages (see page 20 of his presentation).

I don’t disagree with Chairman Bernanke’s assessment, but he curiously excluded the lowering of interest rates through Fed monetary policy as a cause of the housing bubble. Huh. I thought the purpose of Fed monetary policy was to stimulate economic growth and employment.

I noticed he left outPresident Clinton’s National Homeownership Strategy which laid out a plan to lower underwriting standards and work with their partners Fannie Mae and Freddie Mac. And they obliged. [HUD removed the NHS from their website, but my pal Josh Rosner kept a copy].

The housing bubble was the result of a number of factors, but to exclude The Fed’s role of lowering interest rates (and ignoring The Federal government’s role in the housing crisis) is … huh?

Oh, and The Fed was the regulator for many of the banks.

I am not blaming The Fed either. I am simply presenting alternative explanations. I report, you decide!

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