WASHINGTON (MarketWatch) - The Federal Reserve had a role in inflating the housing bubble, but it wasn't low interest rates in the U.S. that fueled speculation in housing around the globe, Fed Chairman Ben Bernanke said Sunday.

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Bernanke conducted a kind of post-mortem on the housing bubble. Using historic relationships, he concluded that low interest rates were responsible for about 5% of the change in housing prices, while greater global capital flows explained about 30% of the change.

The biggest cause of the bubble was exotic mortgages and the decline in underwriting standards, he said. Buyers were able to lower their initial monthly payments, which allowed prices to soar to unsustainable levels.

"Both lenders and borrowers became convinced that house prices would only go up," Bernanke said. "Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages. For a time, rising house prices became a self-fulfilling prophecy, but ultimately, further appreciation could not be sustained and house prices collapsed."

"That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary," Bernanke said. "Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates."

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http://www.marketwatch.com/story/low-rates-didnt-cause-bubble-bernanke-says-2010-01-03

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In other news, overweight fox denies entering henhouse.

To be fair, it wasn't his fault. Greenspan slashed rates to 1% and held them there after the tech/nasdaq bubble collapsed to boost the economy, and that was the FIRST RECESSION IN HISTORY where housing starts did not decline. It was at that point in time where everyone (regular families and investors) got the false (fed-fueled) impression that housing can only go up, and that real estate is the best investment you can make..That buying/renting/flipping is a fantastic way to make money with virtually no risk. "Even in sharp recessions and following a terrorist attack, real estate goes up..You can't lose! Woohoo!" Lenders certainly share part of the blame, but the fact is without excessive montetary stimulus people would not have jumped to false conclusions following the collapse of 2000-01 and would not have rushed so wildly into that sector to blow up a new bubble.

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Originally posted by Capitalizt In other news, overweight fox denies entering henhouse. To be fair, it wasn't his fault. Greenspan slashed rates to 1% and held them there after the tech/nasdaq bubble collapsed to boost the economy, and that was the FIRST RECESSION IN HISTORY where housing starts did not decline. It was at that point in time where everyone (regular families and investors) got the false (fed-fueled) impression that housing can only go up, and that real estate is the best investment you can make..That buying/renting/flipping is a fantastic way to make money with virtually no risk. "Even in sharp recessions and following a terrorist attack, real estate goes up..You can't lose! Woohoo!" Lenders certainly share part of the blame, but the fact is without excessive montetary stimulus people would not have jumped to false conclusions following the collapse of 2000-01 and would not have rushed so wildly into that sector to blow up a new bubble.

No empirical data huh?

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^ I would look at it more of a cause / effect thing: If rates weren't low, people likely wouldn't have borrowed as recklessly as they did (especially lower & middle income people)

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Paul

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Originally posted by pmoisse ^ I would look at it more of a cause / effect thing: If rates weren't low, people likely wouldn't have borrowed as recklessly as they did (especially lower & middle income people)

Yes, but based on historical data, low interest rates accounted for only 5% of the rise in house prices. Nobody was holding a gun to the bankers' collective heads telling them to lend subprime mortgages. They were to eager to do it themselves, they couldn't do enough of them.

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Originally posted by Krypton Yes, but based on historical data, low interest rates accounted for only 5% of the rise in house prices. Nobody was holding a gun to the bankers' collective heads telling them to lend subprime mortgages. They were to eager to do it themselves, they couldn't do enough of them.

Fair points, but if nobody was holding a gun to their heads, why did they take on so much risk with so many subprime mortgages?

The whole system was asleep at the wheel with a hard-on at the prospect of easy money: from seniors looking for that retirement fund boost, middle income people looking for quick cash or college tuition for their kids, people who would have been better off renting due to lower / unstable incomes...then the bankers and lenders that made this ATM work for everyone that ultimately failed everyone.

No one segment of the economy is squarely to blame.

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Paul

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Originally posted by pmoisse Fair points, but if nobody was holding a gun to their heads, why did they take on so much risk with so many subprime mortgages?

The very thing that drives capitalism. Greed. Greed that ran amok.

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No one segment of the economy is squarely to blame.

Tell that to fundamentalist libertarians (i.e. Ron Paul brigades) who think 99.999% of everything bad that happens is the Federal Reserve's fault.

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Originally posted by Krypton Tell that to fundamentalist libertarians (i.e. Ron Paul brigades) who think 99.999% of everything bad that happens is the Federal Reserve's fault.

We can agree the whole system was asleep but mindless americana isn't going to practice safe borrowing/lending when most aren't educated in the least about money management and everyone is told "The economy is fantastic, despite this or that, go to the mall!" Unfortunately too many people followed that advice. All of this was heavily encouraged by a low, unwavering interest rate, no? Ultimately the fed is at the steering wheel and everyone else is more like a child in the back seat asking if we can stop to get ice cream?

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Originally posted by D-res We can agree the whole system was asleep but mindless americana isn't going to practice safe borrowing/lending when most aren't educated in the least about money management and everyone is told "The economy is fantastic, despite this or that, go to the mall!" Unfortunately too many people followed that advice. All of this was heavily encouraged by a low, unwavering interest rate, no? Ultimately the fed is at the steering wheel and everyone else is more like a child in the back seat asking if we can stop to get ice cream?

I would say the Fed is the gas station, the economy, the driver behind the wheel. The Fed pumps the gas. The economy decides where to go with their full tank of gas. I don't see it as very rational to blame the Fed for where the economy decided to go all by themselves. Banks and investors euphorically underwrote, bought, and sold subprime mortgages, and their accompanying derivatives, with greedy glee. I still haven't seen a good reason why the Federal Reserve is fully responsible for all this. I'm not referring to pmoisse, who said, "No one segment of the economy is squarely to blame." I am referring to those, capitalizt I believe, who think it was all the Federal Reserve's fault. As Ron Paul says, "End the Fed." I'm referring to these ridiculous arguments.

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very compelling argument. There was so much going on that it is difficult to attribute the financial crisis to any one component. For instance, we had exotic securities in which the banks didn't even give a shit about credit-worthiness because they were unloading risk to unknowing security purchasers. Then, there were the credit rating agencies that facilitiated that process by rating securities higher than they should have been rated. The flawed view that RE value can never fall was also a significant contributing factor (banks don't care about the credit-worthiness if they have an equity cushion). Additionally, the lower fees and down-payment requirements associated with the shady financing companies contributed to the mess (again, they didn't need equity because they didn't retain the risk). Foreign capital that financed this shit-show certainly didn't help. As anyone with a community college education should know, an excess of capital means lower borrowing costs. There was also that federal policy of pushing home ownership to unqualified purchasers.

I find the 5% number almost impossible to support, and I would guess it's probably a little higher, but i think his logic is sound.

There’s no doubt that low interest rates contributed, but unlike the other un-learned people in this thread im not about to second-guess Bernanke on the issue, especially not due to ideological preconceptions. Even had rates been higher it wouldn’t have prevented sub-prime loans being issued willy-nilly. And while the CRA may have had a small effect on the loosening of lending standards, ultimately the responsibility for such loans (75% of TARP funds were unrelated to the CRA) lies with the lending banks, and only the banks.

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"That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary," Bernanke said. "Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates."

Do they really need to state the obvious? If you wanted to state an obvious example of a well regulated and supervised banking industry you really only have to look at Australia... which I might add currently has one of the most robust economies in the world because fairly much all with the exception of one (Macquarie Bank) played by the rules, didn't over-extend into the US securities market and came away relatively unscathed.
Plus, it has massive ties to China in the export market so the key really is diversification of interests for anyone outside the US.
Local housing industry took a small dip for about 3 months, all that did really was create a buyers market, after that it was back to a sellers market and some of us didn't do too badly out of that