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Ben Bernanke, in a speech in Atlanta on January 3, blamed the economic and markets crisis, and specifically the housing bubble, of 2008-2009 on poor regulation, not on the Federal Reserve's policy of keeping interest rates low. Bernanke, who succeeded Alan Greenspan as Fed Chairman in February 2006, has been nominated for a second term by President Obama, was approved by the Senate Banking Committee on December 16 for that second, and awaits confirmation by the full Senate.
In his remarks to the American Economic Council, Bernanke addressed critics who "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."
In a long speech supplemented by slides (click here to view full speech)--Bernanke first considered the possibility that the Fed's "accommodative policies," in the early to mid-2000s, "though perhaps appropriate for achieving medium-term inflation and output goals--inadvertently contributed to the housing bubble." Quoting the research of several economists, Bernanke concluded that "only a small portion of the increase in house prices earlier this decade can be attributed" to the Fed's monetary policy.
Instead, he described what happened this way: "At some point, both lenders and borrowers became convinced that house prices would only go up. Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages. For a time, rising house prices became a self-fulfilling prophecy, but ultimately, further appreciation could not be sustained and house prices collapsed."
As a result, Bernanke says this "suggests that regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices."
As for the policy implications of his findings, Bernanke says "stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates," and that "financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter.
The Federal Reserve is moving, he said from an "institution-by-institution supervisory approach to one that is attentive to the stability of he financial system as a whole." He reiterated the Fed's support for a "systemic risk council, that will reorient the country's overall regulatory structure toward a more systemic approach." Calling monetary policy a "blunt tool," Bernanke concluded his remarks by saying that while "all efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis...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."