A Difference of Opinion

It appears Federal Reserve Chairman Ben Bernanke won’t be appearing on VH1’s “Best Week Ever” anytime soon. In a speech last week to the American Economics Association, Chairman Bernanke asserted that he did not believe the Fed’s interest rate policy during the early 2000s was responsible for creating the housing bubble. Of course, the majority of economists believe otherwise and the question of whether the Fed kept rates too low for too long at the beginning of the decade is not merely of trifling academic concern. In order to make wise decisions in the future, policymakers need to have a solid understanding of the key contributing factors that helped set the stage for disaster. Was Fed interest rate policy the only reason for the emergence of the housing bubble, which then prompted the financial crisis that cratered the global economy? Probably not; however, Bernanke needs to consider the likelihood that it helped foster an environment in which banks and borrowers could make some very bad financial decisions that would end up costing them dearly.