Federal Reserve Chairman Ben Bernanke said the central bank's lowinterest rates didn't cause the past decade's housing bubble andthat better regulation would have been more effective in limitingthe boom.
"The best response to the housing bubble would have beenregulatory, rather than monetary," Bernanke said Sunday in remarksto the American Economic Association's annual meeting in Atlanta.The Fed's efforts to constrain the bubble were "too late or wereinsufficient," which means that regulatory actions "must be betterand smarter," he said.
Bernanke said the Fed is working to improve its supervision ofbanks and has strengthened measures to protect consumers ofmortgages and other financial products. Senate Banking CommitteeChairman Christopher Dodd (D-Conn.), who backs Bernanke for a secondterm, has called the Fed's oversight of banks leading up to thecrisis an "abysmal failure." Dodd proposes stripping the Fed andother agencies of bank supervision powers and moving them to a newregulator.
Scholars such as Allan Meltzer, a historian of the central bank,have criticized the Fed for helping fuel the housing boom by keepinginterest rates too low for too long. The bursting of the housingbubble led to the worst recession since the Great Depression and theloss of more than 7 million U.S. jobs.
Meltzer's argument has been echoed by lawmakers including Sen.Richard Shelby (R-Ala.), the senior Republican on the BankingCommittee, who says Bernanke doesn't deserve a second term as Fedchief.
Shelby, at a Dec. 17 vote on Bernanke's nomination to a secondfour-year term starting next month, said the former PrincetonUniversity professor "missed clear signals" of a financial crisiswhen he was a Fed governor from 2002 until 2005.
"I strongly disapprove of some of the past deeds of the FederalReserve while Ben Bernanke was a member and its chairman, and I lackconfidence in what little planning for the future he hasarticulated," Shelby said.
Bernanke didn't discuss the outlook for the U.S. economy or Fedmonetary policy in Sunday's speech or an accompanying slidepresentation.
Increased use of variable-rate and interest-only mortgages, andthe "associated decline of underwriting standards," were moreresponsible for the bubble, Bernanke said.
He left the door open to using interest rates to prevent"dangerous buildups of financial risks" should regulatory changesfail to be made or turn out to be insufficient.
"We must remain open to using monetary policy as a supplementarytool for addressing those risks - proceeding cautiously and alwayskeeping in mind the inherent difficulties of that approach,"Bernanke said.
Responding to audience questions after the speech, Bernanke saidhe wasn't "particularly concerned" about a possible loss of investorconfidence in the U.S. financial system.
The dollar is still the "dominant" world reserve currency, andwhen financial conditions become more "worrisome," investors see thecurrency as a safe haven and U.S. markets as the deepest and mostliquid, he said.
Bernanke devoted most of his speech to rebutting criticism thatthe Fed's rate policy fueled the housing bubble. Monetary policyafter the 2001 recession "appears to have been reasonablyappropriate, at least in relation to" a formula based on the so-called "Taylor Rule." In addition, Bernanke said Fed research showsthe rise in housing prices had little to do with monetary policy orthe broader economy.
John Taylor, a Stanford University economist and former Treasuryundersecretary, created the Taylor Rule, a shorthand formula thatsuggests how a central bank should set interest rates if inflationor growth veers from goals.
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