The Fed Lays Blame On Everyone Else

The Federal Reserve was not to blame for any of the financial events that caused the collapse of the credit markets late in 2008. It is the same credit collapse that caused Congress to create the TARP so that the Treasury could bail out the faltering American banking system.

Ben Bernanke, the Fed chief, said at a meeting of the American Economic Association that “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.”

That is a convenient truth that does not take into account the role that low interest rates may have played in the sharp rise of home prices. Many analysts have pointed out the Mr. Bernanke’s predecessor as head of the Fed, Alan Greenspan, was a proponent of variable rate mortgages. Those mortgages were a source, many economists argue, of unsafe home lending practices and the creation of mortgage-backed securities.

Bernanke’s position is based on the notion that regulation would have prevented aggressive loan practices at banks. What he does not say is that some of the pressure on banks to be more conservative as real estate lenders could have come from the Fed, either directly, or by way of the “bully pulpit” that the Fed chairman has had for decades. Bernanke wants to increase the Fed’s oversight control of the financial industry. That is odd given the Fed’s passive role when it did very little to stop the real estate bubble that grew in the last decade.

The Fed may want to do a better job at what its current charter mandates before asking for a broader set of powers.

Douglas A. McIntyre