Fed chair Bernanke could have acted to burst America's housing bubble – and yet he did nothing.
By Dean Baker
As the senate debates Federal Reserve chairman Ben Bernanke's reappointment, it is striking how the media views blaming Bernanke for the Great Recession as being out of bounds. Of course Bernake bears much of the blame for America's economic collapse.
He was either in, or next to, the driver's seat for the last seven years. Bernanke was a member of the board of governors of the Federal Reserve since the summer of 2002. He served a six-month stint as head of President Bush's council of economic advisors beginning in the summer of 2005 and then went back to chair the Fed in February 2006. This crisis is not a weather disaster like Hurricane Katrina; it is a man-made disaster that was brought about by seriously misguided economic policy. And, after Alan Greenspan, Bernanke was better positioned than any other person in the country to prevent this disaster. The basic argument is very simple. The US had an enormous housing bubble. This bubble drove the economy ever since the last recession in 2001. It propelled the economy directly through a building boom that sent housing construction to record levels. Indirectly, it led to a consumption boom as people spent money based on the $8 trillion in housing equity that was temporarily created by the bubble. In spite of the heroic efforts at obfuscation by many economists, there is not really much to dispute in the above story. Add in the fact that the bubble was both recognisable and preventable, and you have a very solid indictment of Bernanke. The bubble was easy to recognise, Bernanke just failed to do it. Nationwide house prices had already experienced an unprecedented 30% increase by the summer of 2002. Since there was nothing in the fundamentals of the housing market to justify this run-up, and no remotely corresponding increase in rents, Bernanke should have already been aware of the housing bubble by the time he joined the Fed in 2002.
If talk and regulation failed, then the Fed could have used interest rate hikes. A policy of raising interest rates with the explicit target of bursting the bubble – for example, a commitment to raise rates until house prices fall, – would almost certainly accomplish its goal in fairly short order. Bernanke and his sidekick, Greenspan, chose to take none of these measures. Instead they insisted everything was fine the whole time. Things were not fine and the country is paying the price. And yes, it is very much Bernanke's fault. Continue reading at the UK Guardian >> -----------