Yesterday, at the annual meetings of the American Economic Association, Fed Chairman Ben Bernanke offered a continued defense of the Fed’s monetary policies earlier this decade. Essentially he believes that monetary policy did not contribute to the housing bubble. He also makes clear that he believes that the excessively loose policy stance of the Fed after the dot‐​com bubble burst was appropriate given the level of unemployment at that time. Given that today’s unemployment level is even worse, Bernanke has offered us a clear indication that monetary policy will remain excessively loose for the foreseeable future, regardless of the Fed’s inability to actually create jobs.


Bernanke’s remarks also illustrate the contradictions in his own thinking. At one point he comments that it would have been inappropriate for the Fed to response to increases in energy prices, because such prices were viewed as temporary; yet elsewhere he indicates that most market participants viewed house price increases as permanent, yet the Fed felt it was appropriate to ignore those, for what reason we do not know. No where in his remarks does he address the impact of ignoring the single largest item behind consumer spending: housing.


Perhaps the weakest link in Bernanke’s arguments is presenting the false choice of either monetary policy or mortgage underwriting standards. How about accepting that both played a role. Sadly when discussing underwriting standards, Bernanke continues to miss the most essential element: downpayment requirements. Nowhere in his discussion of mortgage defaults does he seem to recognize the role of equity.