The U.S.' accommodative monetary policy in the early 2000s did not contribute greatly to the housing bubble, Ben Bernanke told economists Sunday. Rather, the rapid rise in house prices represented a failure of regulatory policy, the Federal Reserve chairman said.
‘[W]hen historical relationships are taken into account, it is difficult to ascribe the house-price bubble either to monetary policy or to the broader macroeconomic environment,’ Bernanke said at an American Economic Association meeting in Atlanta.
The Federal Open Markets Committee, in response to a mild recession in 2001, kept the target federal funds rate between 1% and 1.75% from December 2001 to June 2004. Calling monetary policy a "blunt tool," Bernanke said that interest-rate increases in 2003 or 2004 sufficient to constrain the housing bubble could have had debilitating effects, weakening the economy "at just the time when the recovery from the previous recession was becoming established."
"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," he said.
SOURCE: Federal Reserve