Whether you agree with Bernanke’s explanation or not, here is what he said according to this report (emphasis added),
“In twin speeches at the annual meeting of the American Economic Association in Atlanta, Ga., Bernanke and his vice chairman, Donald Kohn, responded to critics who suggest that the Fed’s policy of very low interest rates from 2001 to 2005 was the major cause of the housing bubble.
“The magnitude of house-price gains seems too large to be readily explainable by the stance of monetary policy alone,” Bernanke concluded in his speech. Comparisons with other major economies shows that countries with relatively higher interest rates had larger housing bubbles, he said. […]
“Both lenders and borrowers became convinced that house prices would only go up,” Bernanke said. “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.“
“That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary,” Bernanke said. “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.”“
Here is Paul Krugman’s critique of Bernanke’s “somewhat odd speech”,
“I agree with Bernanke that Taylor-rule based criticism of the low-interest policy of 2002-2004 is off base. […]
I also agree that lax regulation of unconventional mortgages was a bad thing.
But Bernanke should have been more forthright about the Fed’s undoubted failures: Greenspan’s rejection of advice about the risks of subprime lending, and the failure of top officials, BB included, to recognize the housing bubble in real time.”
Too bad Bernanke doesn’t seem to put much weight on the needed lessons embedded in The Warning (PBS documentary) – Brooksley Born (full video online).
Click to read full speeches by Chairman Ben S. Bernanke and Vice Chairman Donald L. Kohn at the Fed where references are provided for further reading.
Posted in Economics, investment, Nobel-Prize, politics, united states, World, World Affairs 
