Federal Reserve Chairman Ben Bernanke says low interest rates engineered by the Fed in the early 2000s aren't to blame for the housing boom and bust. But he hasn't convinced fellow economists.
Two surveys conducted by The Wall Street Journal this week found many economists believe low rates did contribute to the bubble.
Fed Chairman Ben Bernanke says low interest rates aren't to blame for the housing boom and bust. WSJ's Jon Hilsenrath tells Kelly Evans why fellow economists aren't buying his argument.
In a monthly survey of mainly Wall Street and other business economists, 42 said low interest rates were partly to blame for the housing boom while 12 sided with Mr. Bernanke and said they weren't. Academic economists who specialize in monetary policy were split in a separate survey: 13 said low interest rates helped cause the housing bubble; 14 said they didn't.
It is more than an academic argument. Fed officials have been trying to understand what went wrong last decade to avoid repeating it. In addition, lawmakers are weighing whether to give Mr. Bernanke a second term and whether to bolster or restrain the Fed's power as a financial regulator.
The Fed pushed its benchmark federal funds interest rate -- at which banks lend to each other overnight -- to 1% in 2003 when Alan Greenspan was Fed chairman and Mr. Bernanke was a member of the Fed board. With the economy weak and deflation a concern, the Fed pushed rates up gradually beginning in 2004. Mr. Bernanke became chairman in 2006.
Retired Federal Reserve Chairman Alan Greenspan, right, talks with Ben Bernanke after Mr. Bernanke was sworn in as chairman in 2006. The federal-funds rate fell to 1% under Mr. Greenspan in 2003.
"The appreciation of house prices was but one of many indicators which called for a somewhat more restrictive interest-rate policy" in 2004 and 2005, said Marvin Goodfriend of Carnegie Mellon's Tepper School of Business. He was an economist at the Federal Reserve Bank of Richmond, Va., during much of that time.
Many economists met Mr. Bernanke halfway -- arguing that low rates played a role in fueling the housing boom, though they may not have been the key force. Some noted that low rates encouraged banks to write the riskier loans that Mr. Bernanke puts at the center of the crisis.
"There is plenty of blame to go all around," said Martin Eichenbaum of Northwestern University, expressing a commonly expressed view. "Loose monetary policy certainly contributed to easy financing, which was one element of the bubble."
The WSJ surveyed economists who are part of the National Bureau of Economic Research's Monetary Policy Program and asked them whether low interest rates caused the housing bubble. Read a sampling of their responses
In both surveys, The Wall Street Journal asked economists whether they agreed or disagreed with the following statement used by Mr. Bernanke in his speech to describe the position of Fed critics: "Excessively easy monetary policy by the Federal Reserve in the first part of the decade helped cause a bubble in house prices in the United States, a bubble whose inevitable collapse proved a major source of the financial and economic stresses of the past two years."
Most of the economists in the Wall Street forecasters' survey, which polls Wall Street, corporate and a few academic economists monthly, agreed with the statement. Allen Sinai, chief economist at Decision Economics Inc., included it on a long list of culprits: "Low interest rates, financial innovations in mortgages, lax regulation, and speculative euphoria."
The Wall Street Journal separately sent emails to 68 members of the National Bureau of Economic Research's monetary economics program, a group Mr. Bernanke led from 2000 through 2002. Twenty-seven of them responded. (Seven members of the group are in public office and weren't included in the survey.)
Many academics who responded were sympathetic to Mr. Bernanke.
"The 'bubble' didn't really get going until 2005-2006, by which time the Fed had raised rates to more or less normal levels," said Kenneth Kuttner of Williams College. "Second, there are lots of instances in which bubbles occurred in the absence of loose monetary policy, and instances in which policy was loose and there was no bubble."
scrosley:Check out the last paragraph, about lots of bubbles being created without loose monetary policy. Has there been many since the FED took over in 1913?
Recessions since the FED: 20, 29, 33, 37, 45, 48, 53, 57, 60, 69, 73, 80, 81, 90, 01, 07.
10 of these are the worst recessions in U.S history. The FED's track record is as bad as it gets.
scrosley: And has there been times of long periods of loose monetary policy with no sort of bubbles?
No. Loose monetary policy inflates bubbles which pop and cause recessions.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
scrosley:Check out the last paragraph, about lots of bubbles being created without loose monetary policy. Has there been many since the FED took over in 1913? If so how were they "made"? And has there been times of long periods of loose monetary policy with no sort of bubbles?
There were three central banks in the USA before the Fed. They were all closed down. The first one only lasted a year, the second one was closed by Jefferson and the third one was closed by Jackson. You could say that the history of the USA is the history of the people against the desire of the bankers to create a central bank.
I would like to see an example of this bubbles being created without loose monetary policies, because I am sure they can not point to one.
Allen Sinai, chief economist at Decision Economics Inc., included it on a long list of culprits: "Low interest rates, financial innovations in mortgages, lax regulation, and speculative euphoria."
what an idiot. none of them see the obvious. as long as the big financial institutions believe they can rely on the US taxpayer to take the beating for their bad gambles, no amount of "regulation" will curb their "speculative euphoria"
and they know they can rely on the US taxpayer. Barney Frank just got a bill through the House promising the banksters another $4trillion of monopoly money if or when they need it.
or maybe they do all see this and its just taboo to say it.
anyways I imagine Kenneth Kuttner defines "bubble" as a rapid expansion of a sector of the market. that can happen without loose monetary policy, for example, look at the expansion of the home computer market in the '80's... its just that loose monetary policy overinflates the bubbles and makes their bursting that much worse.
scrosley: In a monthly survey of mainly Wall Street and other business economists, 42 said low interest rates were partly to blame for the housing boom while 12 sided with Mr. Bernanke and said they weren't. Academic economists who specialize in monetary policy were split in a separate survey: 13 said low interest rates helped cause the housing bubble; 14 said they didn't.
These so called economists have no clue. Including the 42 who said interest rates were partly to blame.
The reason is simple. They lack the tools necessary to understand how and why the capital markets behave in such a way.