01.05.10
Bernanke’s Persuasion Compels
In a speech of Jan 3 to fellow economists, Bernanke pulls out all of his analytical tools to show that loose monetary policy, a common scapegoat, was not to blame for the housing bubble. He points to regulatory and supervisory laxness as a key source of housing market woes. Through a series of related slides and calculations, he illustrates that the availability of alternative mortgage products, the ARMs standard and exotic, which were inappropriate for many borrowers, contributed to the housing bubble and its subsequent demise when price appreciation finally halted. My analysis: Of course, there’s also the many financial institutions that invested in these mortgages too, causing financial market meltdown.
He also comments on the foreign capital inflows issue –the global savings glut hypothesis. Countries with more capital inflows had greater house price appreciation over the period 2001-2006. And one-third of house price appreciation is explained by this relationship of greater inflows. Further, 11 of the 20 advanced economies analyzed had tighter monetary policy alongside greater house price appreciation. So the fed’s accommodative policy did not necessarily contribute to house price appreciation.
More people entering the housing market, which shouldn’t have, and lax underwriting standards, indicate a regulatory response. Regulators, supervisors, and the private sector could have (should have) managed their risks better– regardless of continued dreams of house price appreciation. Bottomline: Monetary policy is a blunt tool for bubbles but can be a policy prescription sidekick when needed.
