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Tag Archives: Ben Bernanke

The hot issue in American politics is the economy. It stems, of course, from the housing boom of the early 2000’s, that inevitably became today’s housing bust. People are angry. They want action. Many of them are calling for tighter regulations and increased oversight of lenders as well as the larger financial sector. Well, the Bush administration has devised a plan. According to this plan, the Federal Reserve would become the great overseer of the financial sector. In fact, the Fed would assume the role of “market stability regulator.” Furthermore,

“The role Federal Reserve Chairman Ben Bernanke and his colleagues have been playing to shore up the financial system would be formalized in the administration plan by giving Fed officials greater power to detect where threats might be lurking in the system.”

How interesting. Under this plan the fox would, indeed, be in charge of the hen house. Let’s remember that the Fed slashed interest rates in the aftermath of the 9/11 terrorist attacks in an attempt to spur demand and encourage consumerism. Americans were led to believe that they could spend and borrow their way into prosperity. Many Americans proceeded to buy overvalued homes which they could not afford. The Community Reinvestment Act, which I highlighted here, also forced lenders to issue loans to many subprime borrowers, who normally would not have qualified for those loans.

Everything that transpired after the interest rate cuts, however, would not have happened if the rates were allowed to be determined by the market. So before we blame the market for the mess, it’s important to remember that it was the Federal Reserve that set and held interest rates well below the normal market level. As far as the great borrowing frenzy is concerned, the Fed was the great enabler.

And now were supposed to trust the Fed to oversee the entire financial sector? We’re supposed to trust the Fed to ensure everything remains copacetic?

Here’s what Ben Bernanke, the Chairman of the Federal Reserve, had to say about the housing boom in 2005, just before President Bush nominated him to become Chairman:

“U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, ‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”

And how did he feel about the prospect of the boom in the housing market coming to an end?

“A moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.”

In other words he simply told everyone to take it easy. Don’t worry. Everything’s under control. That was the message.

Congressman Ron Paul, on the other hand, issued these prescient statements on the housing situation in May of 2004.

“Federal Reserve manipulation of interest rates and the money supply has created a perilous situation for millions of Americans,” Paul stated. “Rising interest rates may well cause housing prices to fall dramatically, leaving many homeowners who bought at the height of the bubble owing more than their homes are worth. Homeowners with adjustable-rate mortgages are especially vulnerable, as are those who used paper gains in real estate values as collateral for second, third, and even fourth mortgages. The Fed’s easy-credit policies are directly responsible for lowering creditworthiness standards and encouraging millions of Americans to overextend themselves. If trillions of dollars in housing equity disappear, no amount of Fed sorcery will keep record amounts of Americans out of bankruptcy.”

Keep in mind that Paul’s statements were issued more than a year before Bernanke shrugged off the looming debacle. Paul predicted that rising interest rates could cause housing prices to fall dramatically, leaving many homeowners owing more than their homes are worth. And then we see this article from marketwatch.com on March 25, 2008, in which it is stated:

“Home prices in 20 major U.S. metro areas have plunged a record 10.7% in the past year as prices continued to decelerate, Standard & Poor’s said Tuesday.

The 20-city Case-Shiller home price index fell a record 2.4% from December to January, the 18th consecutive decline in prices. For 10 major cities, prices fell 2.3% in January and 11.4% for the past 12 months.”
Furthermore, from Bloomberg.com on February 26, 2008:

“Falling prices have trapped many homeowners who would like to sell or refinance their houses because they owe more money on them than the homes are now worth.”

Dr. Paul also highlighted the risk for homeowners with adjustable rate mortgages. In the same marketwatch.com article we see:
“Falling home values could also trigger higher monthly payments for many homeowners with adjustable rate loans.”
And from Bloomberg.com on those rising rates:
“Defaults among subprime borrowers and those unable to meet rising payments on adjustable-rate loans drove foreclosure filings to the highest since August and the second-highest since RealtyTrac started keeping records three years ago.”
So, it would appear that the man who has been labeled by some as a paranoid, crackpot, conspiracy theorist actually had it figured out. And he wasn’t afraid to spell it out, either. The man who is now the Chairman of the Federal Reserve, on the other hand, simply brushed the matter aside.
Now what’s that about the Fed possibly being the “market stability regulator?”