Bernanke Speaks
The American Economic Association is currently having a big shindig in Atlanta. Amongst the main speakers is Ben Bernanke whose comments have, naturally, attracted much attention. Not only is he up for re-appointment at the Fed, but the Fed itself has become the target for much post-crisis criticism. What he has to say, therefore needs to be scrutinized on both counts.
I think that we get insight into whether he is worthy of his job mainly through his commentary on the causes and responses to the crisis. This was the essence of his speech.
Let’s not repeat what he said about the causes of the crisis, but rather focus on his analysis, which boils down to:
- Monetary policy, i.e. interest rates, were not the main cause of the housing bubble and therefore the subsequent implosion of banking.
- Lax regulation was.
His defense of [1] is based on the observation that low interest rates were endemic throughout the developed world and a housing bubble did not erupt everywhere. So low rates cannot be sufficient by themselves to create housing bubbles. At least this last one. This is an attempt to rebut the ‘Greenspan Bubble’ theory that holds that the prolonged loose money policy of the mid-2000’s was a primary, if not the primary, cause of the explosion in home prices. I don’t believe this. Loose money, in an economy already awash with liquidity and in no visible sign of distress, was bound to find its way into an inflationary outlet of some sort. That it didn’t manifest itself in the price of ordinary goods and services, but turned up in an asset price bubble instead, simply shifts the problem around a bit. It doesn’t eliminate the cause and effect of loose money and inflation.
Bernanke clearly sticks to the conventional wisdom that asset price and goods price inflation have different causes. Or at least he wants to rely on our willingness to overlook any connection between the years of stimulative Fed policy and the, apparently unconnected emergence of a real estate bubble. The fact that mortgages were ridiculously cheap did nothing, in Bernanke’s argument, to stimulate demand for homes.
Odd.
Moving on to [2] he suggests that the real reason the housing bubble blew up to such an extraordinary degree was that regulation was lax. This encouraged banks and other lenders to spew out an unchecked torrent of lousy loans that were bound to blow up sooner or later.
I agree that underwriting of loans was insanely dumb throughout the bubble years. There is no excuse for the sheer lunacy of some of the loans that were written. They were doomed before the ink was dry on their contracts.
The problem is that the Fed is a primary regulator. It should have stopped the lunacy before it got out of hand, especially at the very largest banks who are under the Fed’s closest supervision. So having shifted the blame away from the Fed’s policy arm, Bernanke simply pushes it onto the regulatory arm. Moreover he still doesn’t see regulation as a consumer protection activity he sees it as a bank protection activity. His entire prescription for improvement contains scant reference to tightening up consumer protection – about one sentence – whereas the need for ‘systemic risk’ regulation gets tons of attention.
The Fed is our main defender of consumers, especially in real estate, yet its boss glides swiftly beyond defending us from rotten underwriting, straight to the latest glitzy regulatory gimmick. And let’s not forget that he has consistently opposed the establishment of a financial consumer protection agency: an organization that may well have prevented the worst lapses of the financial industry’s orgy of dumbness.
I understand that systemic risk management is an important topic. I have reservations about its practicality and efficacy – just how will we measure and control it? – and I don’t think it was a primary cause of the underwriting debacle. It came to the surface later in the cycle, when the interconnectedness of the major banks was exposed as they all palmed toxic assets off to one another. Plus: as far as I know our regulators had all the tools they needed to rein in the banks. The problem is that they didn’t use those tools. They were either afraid to, or they were prevented by the bank’s obfuscation and political clout from doing their job. So by emphasizing systemic risk regulation and management in his comments as the ‘big lesson learned’ Bernanke seems to miss the main point.
If his comments are an accurate reflection of the Fed’s current thinking on the crisis then we haven’t learned as much as I would have hoped. He offers little by way of concrete action and less by way of deep understanding. This was more a politician’s speech than an economist’s. That isn’t surprising as he lobbies to be re-appointed, but given our circumstances and the ongoing urgent need to control the banks his speech strikes me as oddly light.
I rate it as weak.
Which adds to my growing opposition to his re-appointment.
