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Bernanke Completely Missed the Housing Bubble and Downplayed Its Consequences Even After it Burst
The Post told readers today that Federal Reserve Board chairman Ben Bernanke "response to the financial crisis has won him plaudits from congressional Democrats who view him as pragmatic and non-ideological." That may be true, but it might also be worth mentioning that Bernanke completely missed the housing bubble. Furthermore, even after it began to burst he repeatedly downplayed its consequences.
In March of 2007, after the first shock waves from the subprime market were being felt, Bernanke assured Congress that the fallout was likely to be restricted to the subprime market. The following year, after Bear Stearns failed, he told Congress that he didn't see another Bear Stearns out there. Six months later, Lehman Brothers and AIG failed. If Bernanke had been quicker to recognize the severity of the problems created by the collapse of the housing bubble, he may have been able to prevent much of the current financial chaos.
--Dean Baker
COMMENTS (5)
Let's be honest here. BB didn't "miss" the housing bubble. He HAD to know about it by the Spring of 2006 when he commented that housing prices were determined by "fundamentals".
He CHOSE to ignore the significance of letting it play out, probably because he (like so many others) figured there was little to personally gain by speaking truth to power.
Posted by: bailey | November 10, 2008 8:01 AM
Bernanke may not be a big player in the Republican party, but that does not mean he is not ideological economically. He announced that in principle bubbles could not be recognized - or in other words that anything that happens is due to "fundamentals". He also proclaimed that the Fed (or at least he himself) has the knowledge and power to prevent depressions, presumably after the downturn since he refused to intervene before. His actions in the crisis have been to protect the financial industry and little else.
His economic ideology is in fact that of the Republican party; he would not have been appointed otherwise. Reliance on the Maestros of the Fed to save everything in case there was any trouble has been an important part of the Republican economic strategy since they got their own man Greenspan in as Chairman.
Posted by: skeptonomist | November 10, 2008 9:20 AM
Alternative hypothesis- Bernanke recognized the bubble that existed as he took power. The bubbe had to deflate, either quickly or slowly. If the fed chairman mentions the bubble and it deflates quickly, the people would blame him. They would say that his words caused the crisis.
Posted by: Erik L | November 10, 2008 11:10 AM
won him plaudits from congressional Democrats who view him as pragmatic and non-ideological
Sure, one might think Bernanke is pragmatic and non-idealogical to use taxpayer money to subsidize activities that the market has shot down if one is on the receiving end of campaign contributions intended to protect those activities.
Posted by: patient renter | November 10, 2008 12:29 PM
Bernanke was right to "down play" the housing bubble as a threat to the economy. It isn't; it never was.
If Bernanke is to be criticized such criticism must be based upon his failure to understand the effects of the repricing of risk, principally, in the CDS and CSO markets.*
* It was not until late July 2007 that Bernanke noticed that there were "increased concerns about credit risk on some other types of financial instruments."
Posted by: Ellen1910 | November 10, 2008 12:57 PM