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[Housing Bubble Golden Rule -> 3 R’s] Regulating, Rates and Recession

In Bernanke’s speech to the American Economic Association [1] on Sunday he suggested that it was regulatory failure, not keeping rates too low for too long [2], which caused the housing bubble.

Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.

This seems to be splitting hairs, doesn’t it?

Low rates triggered the housing bubble as money became cheap and easy to get. If the Fed hadn’t kept rates too low for too long, the bubble would not have happened. The regulatory system was ill prepared for the insanity that followed. House prices rose so fast that underwriting had to evaporate to keep the mortgage pipeline full. Regulators hadn’t seen this before and with the removal of Glass-Steagal and Laissez-Faire mindset, everyone in DC, including Congress and regulators, drank the Kool-aid.

Actions Taken Too late [3]

Mr. Bernanke has pointed to the Fed’s extraordinary efforts to stem the crisis, including the creation of new lending vehicles to banks and a reduction of bank-to-bank interest rates to virtually zero, as evidence that the Fed has a firm grasp of what the economy needs. The Fed’s handling of the crisis has been widely praised by economists.

The Treasury and other government agencies already have supervisory power over parts of the financial system, but so, too, does the Federal Reserve.

In his talk on Sunday, Mr. Bernanke acknowledged as much, rattling off a list of regulatory efforts the bank made to address nontraditional mortgages and poor underwriting practices.

But, he said, “these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble.”

All regulators are human and subject to mob mentality just like politicians and consumers were. Everyone is awake now. That’s why I think a “bubble czar” type position is silly. I’m not blaming the Fed or Bernanke. Now about Greenspan….

In fact I think the Fed has done an excellent job keeping our financial system from the brink. Lets recognize Bernanke’s comments for what they are – dodging the minefield of Congressional approval. God help us if Congress is able to audit the Fed [4]. Its not the audit I object to – its the politicalization of it. We need to keep the Fed neutral (in theory).