Bernanke in Atlanta By MIKE WHITNEY

[Crewleader]

January 4, 2010

Easy Money and the Housing Bubble

Bernanke in Atlanta

By MIKE WHITNEY

In an effort to defend himself against his critics, Fed chairman Ben Bernanke spent over 2 hours at the Annual Meeting of the American Economic Association in Atlanta trying to prove that low interest rates were not the main cause of the housing bubble. Here's an excerpt from Bernanke's speech:

"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."

Bernanke is right in saying that the majority of economists now believe that exotic mortgages and lax lending standards were the main cause of the bubble. But that doesn't mean that the Fed's accomodative monetary policy didn't play a big part, too. When the Fed lowers the price of money below its inflation-adjusted value, it provides a subsidy to borrowers. That leads to a flurry of speculation which helps to rev up economic activity and lift the economy out of recession. But there are unintended consequences to loose monetary policy as well, like the emergence of gigantic asset bubbles. Whether low interest rates were the "primary" cause of the housing bubble or not is irrelevant. The point is, bubbles can always be contained by raising rates and reducing the flow of credit. No one doubts that if ex-Fed chair Alan Greenspan had raised rates by a full percentage point in 2003, the frenzied spending in real estate would have slowed dramatically.

http://www.counterpunch.org/whitney01042010.html

[peacetalksforall]

1. I want that man out of the money business. It's time for him to retire to raking leaves and not

screwing us up. Why is he Obama's nominee?

[whattheidonot]

2. low wages, house buyers.

The new economy has many low wage jobs. when money was cheap these people bought houses with flimsy credit thinking that the value of their house would make up for their jobs of little value. when the rates changed or they refinanced it became clear their salaries did not fit the deal few could afford to buy their house and they could not pay for it so it was foreclosure time. How was this allowed to happen? Why? Did not the economist and social planners not see the madness of all this? The whole system of local and state governments relies heavily on true value real estate. the only thing that makes anything valuable is a sound economy. It would be much better to create houses that low wage people can maintain while they save. I am not sure banks are much interested in this. perhaps Walmart could do something about cheap housing. Actually i think they have. They open up places where land is cheap, competition nominal, get huge concessions and then cheap apartments follow creating little Walmart communities. Local manufactures and business would normally follow but they can't compete to sell to Walmart or against Walmart. So Walmart locks up everything. Sort of like farmworkers living on the farm.