Monday, January 4, 2010

'Housing bubble caused by somone else,' claims Bernanke

Speaking at the annual meeting of the American Economic Association, Ben Bernanke said the evidence had convinced him that the Fed was not responsible for the housing bubble which spearheded the recent financial meltdown.

If it makes you feel better Mr. Bernanke, I belive you. I belive that Elmo is to blame.

The actions in question are those that where taken during the early 2000s, when the feds lowerd intrest rates to spur economic growth

Simple math dictates that if rates go down significantly, asset prices would be bid up using leverage until the return on the asset approaches the return on the interest of the debt. This Caused the prices of houses to soar ever higher. In some parts of the United States, especialy costal areas, home prices increased an unsustanable 400%! YIKES!

It was after this tremendous increase, and only then, (circa late 2005) that the feds raised interest rates. What happend next was entirely predictable. Fewer people could afford to buy because, as explained earlier, the return on investment  became smaller than the interest on the debt. Ergo, no more buyers. This left overzealous investors holding the bag. Of course, facing insurmountable amounts of debt, most decided to take their lumps and default.

So no, the fed is not entirely to blame, but their actions directly impacted, and fostered an environment that led up to the housing bubble. Two things stand out to me about Mr. Bernanke's speech: 1) he is not being entirely truthful about the extent of the governments involvement, or 2) he actually believes that the government played no part in the downturn. Either way... I expect Elmo's resignation on my desk by tomorrow morning.

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