Excessively easy monetary policy wasn't to blame for the housing "bubble," the chairman of the Federal Reserve, Ben Bernanke, said today in Atlanta at a meeting of the American Economic Association. The text of his remarks, as well as the slides that went along with them, is available at the Federal Reserve Web site. The arrogance of central planning is very much on display. The Wall Street Journal news article about the speech reports, "The Fed's views on asset bubbles are slowly changing. Earlier this decade, when Mr. Bernanke was a Fed governor, he and other central bank officials said financial bubbles weren't something the Fed could identify or pre-empt effectively. ..Sunday, he accepted that there might be situations that warrant such an approach." Bubbles are an unfortunate consequence of group-think and attempts to guess the future; if the Fed acts to prevent them by raising interest rates, it also risks retarding growth and making it more difficult for investors to take risks. Nearly as striking, to my eyes, was the section of the speech where Mr. Bernanke spoke of everything the Fed had done to try to rein in what he called "more exotic types of mortgages":
In 2005, we worked with other banking regulators to develop guidance for banks on nontraditional mortgages, notably interest-only and option-ARM products. In March 2007, we issued interagency guidance on subprime lending, which was finalized in June. After a series of hearings that began in June 2006, we used authority granted us under the Truth in Lending Act to issue rules that apply to all high-cost mortgage lenders, not just banks.
Mr. Bernanke concluded: "The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter." Others may take different lessons. The point about regulation made by Derek Scott comes to mind: "it's called 'better' but it means 'more.'" No one ever calls for worse or dumber regulation, but somehow, the regulations still somehow often fail to achieve the regulators' ideal of a bubble-free, inflation-free, ever-growing, full-employment, full home-ownership economy, no matter how many Ph.D. economists are recruited to draft and administer the rules and no matter how hard they work to administer them.
Mr. Bernanke notes that "House prices began to rise in the late 1990s" and links that to "the increasing use of more exotic types of mortgages and the associated decline of underwriting standards." It's hard to see how this is borne out by statistics: a Freddie Mac survey released in January 2008 reported, "ARMs accounted for 17 percent of loan applications in October 2007, according to Freddie Mac's Primary Mortgage Market Survey®, the lowest since June 2003 when fixed-rate loans were near a 45-year low in interest rates and refinance activity was near a peak. Since 1995, the first year that Freddie Mac collected ARM share data, the ARM share has fluctuated between an annual low of 11 percent in 1998 and a high of 33 percent in 2004." If it was the ARMs that were the problem, why didn't the bubble burst in 2004 or 2005 rather than in 2008? ARMs had been made legal in 1982 by the Garn-St. Germain Act, whose co-sponsors included Charles Schumer, then a first-term congressman from Brooklyn. One thing that did happen in the late 1990s was the dramatic relaxation, in 1997, of the capital gains tax exclusion on housing. Mr. Bernanke doesn't mention it as a factor.