Bernanke's Latest Story...
Bernanke must think we're all suffering from a case of amnesia. In a speech at the Annual Meeting of the American Economic Association in Atlanta on Saturday, Bernanke said that interest rates were not the main cause of the housing bubble. Here's an excerpt... ~ Mike Whitney
"Some observers have assigned monetary policy a central role in the crisis. Specifically, they 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...
With respect to the magnitude of house-price increases... Economists who have investigated the issue have generally found that, based on historical relationships, only a small portion of the increase in house prices earlier this decade can be attributed to the stance of U.S. monetary policy."
This is true. Exotic mortgages and lax lending standards were the main cause of the bubble, but that doesn't mean that monetary policy didn't play a big part in the debacle. It did. And, keep in mind, that Bernanke continued to deny the existence of a bubble well into 2005, when the facts overwhelmingly indicated otherwise. Take a look at this article which appeared in the Economist in 2005. This is just some of the data that was circulating at the time in the financial media. (Two months after I read this article, I put my house up for sale.)
From the Economist 2005: The current worldwide boom in residential real estate prices is "the biggest bubble in history"
The total value of residential property in developed countries rose by more than $30 trillion, to $70 trillion, over the past five years – an increase equal to the combined GDPs of those nation
23 percent of all American houses bought last year were for investment, not owner-occupation, showing that speculation in the real estate market is rampant. CNBC reports that in Miami, a hotbed of condominium building, an estimated 70% of condo buyers are investors/speculators, and not residents.
Due to various new forms of riskier mortgages, 42 percent of first-time buyers – and 25 percent of all buyers – made no down payment on their home purchase last year, the NAR disclosed, making them especially vulnerable to a downturn in resale prices.
In California, 60 percent of all new mortgages this year are interest-only or negative-amortization. These loans are gambles that prices will continue to rise.
Never before had home prices risen so fast, for so long, and yet, neither Bernanke nor his boss Alan Greenspan did anything to slow the process. Whether interest rates were primarily responsible or not; the Fed's regulatory duties include overseeing the financial markets and maintaining stability. Does anyone doubt that raising interest rates even by a mere 1 percent would have put an end to the frenzied real estate speculation?
Bernanke again: "For our part, the Federal Reserve has been working hard to identify problems and to improve and strengthen our supervisory policies and practices, and we have advocated substantial legislative and regulatory reforms to address problems exposed by the crisis."
Bernanke and his fellows have offered no constructive regulatory changes and have made sure that securitization, off-balance sheet operations, capital requirements, executive compensation and derivatives trading continue as they have. The Fed is a ferocious defender of the status quo despite the obvious dangers that the present anarchic system poses to the country.
Nothing has changed. The financial system would collapse tomorrow if it wasn't for the explicit government guarantees. Investors continue to trust the "full faith and credit" of the US Treasury; not Bernanke, not Wall Street, and not a system which has already been exposed as thoroughly corrupt.
Bernanke again: "With respect to the magnitude of house-price increases... 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."
Yes; and who offered their explicit support for the various ripoff mortgage products?
Here's a quote from Maestro Greenspan that answers that question...
"Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to the rapid growth in subprime mortgage lending…fostering constructive innovation that is both responsive to market demand and beneficial to consumers.”
Hurrah, for subprime, says Greenspan.
And who was the champion of mortgage backed securities, a market which shrunk from $700 billion to $10 billion in a little more than a year."
Greenspan again: “The development of a broad-based secondary market for mortgage loans also greatly expanded consumer access to credit. By reducing the risk of making long-term, fixed-rate loans and ensuring liquidity for mortgage lenders, the secondary market helped stimulate widespread competition in the mortgage business. The mortgage-backed security helped create a national and even an international market for mortgages, and market support for a wider variety of home mortgage loan products became commonplace. This led to securitization of a variety of other consumer loan products, such as auto and credit card loans.”
And who served as Wall Street's most enthusiastic pitchman for opaque derivatives, garbage loans, and the wide assortment of dodgy debt-instruments? Here's Greenspan again:
“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advance in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.”
Sounds like a ringing endorsement of financial innovation to me. And, of course, Greenspan was supported throughout his tenure by his right-hand man and accomplice, Ben Bernanke. They are equally culpable for the disaster.
While there's nothing wrong with rewriting history to suit one's purposes, Bernanke might want to wait a year or so until the dust settles. Maybe we will have forgotten by then.
Mike Whitney - January 3, 2010 - source SmirkingChimp