by tinpeng » Mon Jan 04, 2010 7:31 pm
Bernanke Says Regulation Came ‘Too Late’ to Curb Housing Bubble By Scott Lanman
Jan. 4 (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 yesterday 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 criticized 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 U.S. 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.â€
Shelby Criticism
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 U.S. economy or Fed monetary policy in yesterday’s speech.
Separately, Fed Vice Chairman Donald Kohn said at the conference that tight bank credit and caution among households and businesses may impede spending amid an improvement in financial markets. The Standard & Poor’s 500 Index climbed 23 percent last year, its best performance since 2003.
‘Very Cautious’
“Households and businesses and bank lenders remain very cautious, and the odds are that the pickup in spending will not be very sharp,†Kohn said.
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.
He left the door open to using interest rates for preventing “dangerous buildups of financial risks†should regulatory changes fail to be made or turn out to be insufficient.
“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.
Responding to audience questions after the speech, Bernanke said he wasn’t “particularly concerned†about a possible loss of investor confidence in the U.S. financial system. When financial conditions become more “worrisome,†investors see the dollar as a safe haven and U.S. markets as the deepest and most liquid, he said.
Policy ‘Appropriate’
Bernanke devoted most of his speech to rebutting criticism that the Fed’s rate policy fueled the housing bubble. Monetary policy after the 2001 recession “appears to have been reasonably appropriate, at least in relation to†a formula based on the so-called “Taylor Rule.†In addition, Bernanke said Fed research shows the rise in housing prices had little to do with monetary policy or the broader economy.
John Taylor, a Stanford University economist and former Treasury undersecretary, created a shorthand formula that suggests how a central bank should set rates if inflation or growth veers from goals.
Under former Chairman Alan Greenspan, the Fed lowered its benchmark rate to 1.75 percent from 6.5 percent in 2001 and cut it to 1 percent in June 2003. The central bank left the federal funds rate for overnight interbank lending at 1 percent for a year before raising it in quarter-point increments from 2004 to 2006.
Rates Slashed
Bernanke, 56, joined the Fed as a governor in 2002 and supported all of the interest-rate decisions under Greenspan before being appointed chairman in 2006. After the financial crisis struck, he cut the federal funds rate almost to zero in December 2008 from 5.25 percent in September 2007.
The standard Taylor Rule would have recommended that the Fed raise the rate to a range of 7 percent to 8 percent through the first three quarters of 2008, “a policy decision that probably would not have garnered much support among monetary specialists,†Bernanke said. A variation of the rule used by the Fed focused on anticipated rates of inflation, not actual rates, he said.
