Wikinvest Wire

The Bernanke speech - day 11

Thursday, January 14, 2010

David Wessel writes in today's Wall Street Journal that Federal Reserve Chairman Ben Bernanke's speech from eleven days ago provides some "puzzling bubble logic".

Ben Bernanke sounds like a fellow who hasn't learned anything.

In a speech to the American Economic Association, the U.S. Federal Reserve chairman argued that the ultra-low interest rates that he and Alan Greenspan pursued in the 2000s didn't cause the housing bubble that produced what Mr. Bernanke calls "the worst financial crisis in modern history."
This defies common sense. When interest rates are really low, people tend to borrow a lot. When people borrow a lot, they tend to bid up the price of assets such as houses and stocks. If the Fed decides the price of houses and stocks are going up too fast and too far, it could surely restrain that rise by raising interest rates to make borrowing more expensive.

But Mr. Bernanke is a smart guy. He has been thinking about this speech for months, and had a seven-member team of Fed economists laboring on a background paper with 100 references. So what the heck was he thinking?
Wessel then suggests a few things that the Fed chairman may have been thinking, but the greatest insight comes from economist Raghuram Rajan of the University of Chicago who notes, "Monetary economists will applaud [the Bernanke speech] because it says everything they have been doing for years is fine. The rest of us should worry."

Ahhh... The gift that just keeps on giving...

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