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article imageBernanke: Lax Regulation to Blame for Housing Bubble

By Chris Dade     Jan 3, 2010 in Business
Ben Bernanke, Chairman of the U.S. Federal Reserve, said on Sunday that a lack of regulation, rather than low interest rates, was the main reason for the housing bubble which, when burst, was largely responsible for the recent global financial crisis.
Addressing the annual meeting of the American Economic Association in Atlanta, Georgia, Mr Bernanke, Chairman of the Federal Reserve since February 2006, acknowledged that raising interest rates could play a part in addressing future asset bubbles but nevertheless insisted that better regulation would have slowed down the housing boom that took hold over the early and middle parts of the last decade, eventually leading to "a bust" that in turn brought on a financial crisis said to be the worst in some 70-80 years.
Mr Bernanke, whose reappointment as Federal Reserve Chairman is expected to receive full Senate approval very shortly, is quoted by the New York Times as saying: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
He added:When historical relationships are taken into account, it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment
The assertion made by Mr Bernanke that poor oversight when it came to the mortgage industry, not just by the Federal Reserve - which could lose some of its powers to regulate banks to a new agency in the near future - but also by other bodies concerned with regulation of the financial sector, was a bigger factor than low interest rates in aiding the housing boom appeared to receive support from Dale Jorgenson, a Harvard professor who first encountered the Federal Reserve Chairman when Mr Bernanke was a student at the Massachusetts Institute of Technology (MIT) in the 1970s.
However, according to the Wall Street Journal, Professor Jorgenson did still criticize Mr Bernanke because he believes that the 56-year-old head of the Federal Reserve did not berate Congress for the encouragement it gave to "reckless mortgage lending" by the likes of Fannie Mae and Freddie Mac.
And Bloomberg reports that Allan Meltzer, professor of Political Economy at Carnegie Mellon University's Tepper School of Business in Pittsburgh, Pennsylvania, is one scholar who does believe that low interest rates were key to the housing boom that came to a spectacular end approximately two years ago, a view shared by Senator Richard Shelby from Alabama, the senior Republican member of the Senate Banking Committee and opponent of Mr Bernanke being granted a second term as Federal Reserve Chairman.
Senator Shelby has reportedly stated:I strongly disapprove of some of the past deeds of the Federal Reserve while Ben Bernanke was a member and its chairman, and I lack confidence in what little planning for the future he has articulated
Another Senator highly critical of Mr Bernanke, says the New York Times, is Bernard Sanders of Vermont, elected as an Independent but a self-proclaimed Socialist who usually votes with the Democrats.
Explaining to his audience in Atlanta that the Federal Reserve, currently facing the prospect of being audited if a bill introduced into the House by Republican Congressman Ron Paul of Texas becomes law, has plans already in place to withdraw the stimulus measures it employed at the height of the financial crisis, the man who succeeded Alan Greenspan as head of the central bank in the U.S. dismissed concerns about investors losing confidence in the U.S.
Indeed, when responding to questions from those who heard him speak in Atlanta, Mr Bernanke expressed confidence that, with it remaining the “dominant” world reserve currency, the dollar would continue to be a safe haven currency in times of economic turmoil.
At the present time the interest rate in the U.S. is 0.25 percent, a rate that has applied since December 2008.
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