Friday 18 May 2007

Bernanke on Housing

In response to the cooling housing market and news that 44% of banks were tightening their lending standards Fed reserve chief Ben Bernanke told at conference at the Chicago Federal Reserve Bank that:

Curbs on this lending are expected to be a source of some restraint on home purchases and residential investment in coming quarters,"

He predicted increases in delinquencies and foreclosures this year and next as adjustable-rate loans face interest-rate resets. Whilst admitting that the housing market slump had been an important source of the slowdown in the economy he added that:

"we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Again we come across this grey area, how significant does it have to be to be regarded as significant? Difficult to quantify and a question I'm sure Bernanke doesn't want to touch. He went on to say that:

"Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market." "The troubled lenders, for the most part, have not been institutions with federally insured deposits."

Sen. Charles Schumer had the audacity to question Bernanke's confidence

"I hope that Chairman Bernanke is right when he says that a slumping housing market will not affect the broader economy, but I would not bet the house on it,"

Also of interest was where Bernanke laid the blame for the sub-prime meltdown. It seems exuberance over home prices, intense competition for lending, increased securitization of mortgages, and delusions and misrepresentations by lenders and borrowers alike were the culprits. Hmmm, funny there is no mention of the Fed's role in deflating interest rates to artificially low levels and printing money hand over fist to encourage the aforementioned evils. Bernanke went on to outline the tough job the Fed has:

"Regulators must walk a fine line," "we must do what we can to prevent abuses or bad practices, but at the same time we do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers."

The first line almost sounds like an attempt to take some responsibility but that is quickly swept away by next line. Well to prevent abuses and bad practices how about trying to promote real economic growth rather than inflating asset prices through paper speculation?

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