Chairman Bernanke on Monetary Policy and the Housing Bubble

by admin on January 6, 2010

Federal Reserve Chairman Ben Bernanke presented his views on Monetary Policy and the Housing Bubble on January 3, 2010 at the Annual Meeting of the American Economic Association, Atlanta, Georgia.

During his speech, Chairman Bernanke blames the housing bubble on lack of financial regulation. He dismisses any blame on monetary policy that led to the largest financial crisis since the Great Depression.

Bernanke noted that the most important source of lower initial monthly mortgage payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary.

Bernanake continues, “if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks–proceeding cautiously and always keeping in mind the inherent difficulties of that approach. Clearly, we still have much to learn about how best to make monetary policy and to meet threats to financial stability in this new era. Maintaining flexibility and an open mind will be essential for successful policymaking as we feel our way forward”.

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