Fed Chairman Ben Bernanke went on the offensive yesterday at the annual meeting of the American Economic Association, arguing that lax regulatory oversight, not loose monetary policy, led to the housing bubble and subsequent financial crisis. You can read his remarks here.
After working behind the scenes for most of the fall, lobbying legislators one-on-one, Bernanke took a very public position yesterday, blaming the rise in housing prices on the alternative types of variable rate mortgages which priced in more demand than that which could be expected from prevailing interest rates.
Bernanke argued that “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.”
Further, he said that “the lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter.”
To some extent he’s trying to deflect the spotlight onto other regulatory agencies chartered with overseeing the factory for different kinds of mortgages. But Bernanke can’t have it both ways. He’s argued in the past that the Fed has a role in consumer financial protection and has lobbied against the CFPA, so, if it is the case that the Fed’s mandate extends to the financial consumer, why did he let these mortgages with low monthly payments proliferate? While he was convincing that there were other factors beyond monetary policy that led to the housing bubble, he was less clear on what kind of regulatory structure would have prevented the bubble and how we should move forward on consumer financial protection. At this point, my bet is that the CFPA has enough momentum to pass with financial reg reform.