Bernanke: Low Rates Didn’t Cause the Housing Bubble

I suppose if I were the head of the Federal Reserve and I had lowered short-term interest rates to freakishly low levels a few years ago and I had promised to keep them there for another few years that I too would probably continue to argue that freakishly low interest rates did not contribute to the massive credit and housing bubble and the financial crisis that followed as Fed Chief Ben Bernanke did in part 2 of his lecture series yesterday: The Federal Reserve after World War II:

Some observations:

The final argument - house prices began to pick up before monetary policy began easing and rose sharply after monetary policy began tightening - shows a clear lack of understanding about how markets are at first emboldened by rising rates, as was the case for commodities in 70s and stocks in the 90s.

Bernanke sounds like Greenspan here - as if the Fed was a casual observer during the run-up to the biggest financial bubble in history when, in fact, they were the world’s most powerful monetary authority with the world’s biggest bully pulpit when it came to influencing behavior in markets.

From some earlier slides - I thought everyone stopped calling the Greenspan years “The Great Moderation” since it ended in such a bust under Bernanke.


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5 Responses to Bernanke: Low Rates Didn’t Cause the Housing Bubble

  1. DCX2 March 23, 2012 at 11:52 AM #

    While I believe that the low interest rates certainly contributed to the crisis by making it easier to get a crappy mortgage, I also believe that had there been no supply of crappy mortgages, or no demand for crappy mortgage backed securities, then the mortgage originators would have been crushed under the weight of their bad mortgages and the housing bubble would never have inflated so drastically.

    Think of it in terms of the dotcom bubble. If we didn’t have a supply of or demand for crappy technology stocks, it would not have been able to inflate.

    Ultimately, though, the Fed and the SEC were still asleep at the wheel. They had other policies in place that made it all but certain that there would be a thriving secondary market for toxic MBS.

    • News March 23, 2012 at 12:25 PM #

      Low interest rates were certainly one of the main root causes. I remember talking to a realtor in 2002 who was pushing me into buying because interest rates were so low.

      Low interest rates is what made investors to search for yield in MBS and thus provided a supply of cheap money to finance mortgages.

      • DCX2 March 23, 2012 at 4:32 PM #

        A realtor can push you to buy all you want. However, if the lenders and brokers had done their job the way it’s supposed to be done - by verifying that you have the income, job, and assets necessary to pay your mortgage - the housing bubble could not have happened.

        As James notes below, there are a bunch of factors that needed to happen in concert in order for the housing bubble to inflate. While low interest rates certainly make it easier to inflate the bubble, they’re more of a “necessary” condition than a “sufficient” one. Likewise, an ample supply of wood and other construction material would be “necessary” for the housing bubble to inflate, but in and of itself such materials would not be “sufficient” for it to inflate.

        • Frank H March 25, 2012 at 1:56 PM #

          If I put a kid in a candy store and he pigs out, who is to blame? the kid (greedy bankers,etc) or the parents (the central bank) ?

    • JamesThomas March 23, 2012 at 12:26 PM #

      FWIW, I agree that it’s not as simple as ONE thing that CAUSED the housing mess (except human greed/stupidity, as always).

      Greenspan and the Fed set it up with low rates.

      Next, the SEC, as always, had its collective head up its ass as the greedy criminal bastards on Wall St. figured out how to bundle and market the crap.

      Then, there’s the ratings agencies that, by all rights, should be sued into oblivion for grading this utter, stinking CRAP AAA and marketing it worldwide.

      Next, there’s the moronic people who “bought” houses they couldn’t afford and then used the easy credit boondoggle to double their debt load with the “equity” in their homes so they could have a bunch of cheap, useless crap made in China.

      And, let’s not forget Congress approving AG and BB and encouraging all this moronic crap (Barney Frank and so many others should all be pilloried, at least) and the various Presidents who not only appointed morons such as AG and BB but even gave AG a Medal! This makes me want to puke.

      BB saying the Fed’s low rates didn’t cause the housing bubble is like the German soldiers in WWII who helped round up the Jews so they could be transported to death camps saying they didn’t kill the people. It’s completely disingenuous and typical rationalization behavior you expect from evil children. Sadly, it’s the norm today for almost everyone.

      The fact that the masses cannot see all this is the scariest part of all. God help us…

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