Wednesday, January 13, 2010
Fed chief Ben Bernanke's speech Monetary Policy and the Housing Bubble from ten days ago is proving to be the gift that just keeps on giving, the latest evidence of such coming in this Wall Street Journal report by Jon Hilsenrath that contains an intriguing graphic and goes a long way in explaining why things are such a mess, monetary policy wise.
Bernanke Challenged on Rates' Role in BustIt really is amazing when you think about it...
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.
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.
How can there continue to be debate about whether something so fundamental and basic to the working of the global economy and financial system - short-term interest rates - was an important factor in its near-death experience?
Somewhere, 19th century and early-20th century economists are no doubt turning over in their graves, not just after seeing what contemporary monetary policy has produced, but how it is being discussed in the aftermath of the worst financial crisis in almost a century.
But, what is most fascinating about the debate is that there is a clear rift within the economics profession between your run-of-the-mill economists and those dismal scientists that specialize in monetary policy and have a "special connection" with the central bank.
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.It is worth noting that the Fed has an undue influence on the economics profession as discussed in Priceless: How The Federal Reserve Bought The Economics Profession over at the Huffington Post some time ago.
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.
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.
Actually, that explains a lot...