Lisa Simpson
Jan 19,2010
In: Foreclosure Crisis

Questions are Being Raised about the Role of the Federal Reserve in Containing Future Foreclosure Crisis

Help against foreclosure crisis.

Ben Bernanke and other regulators had said that if they had had the power they would have prevented the worsening of the financial crisis. It is thus understandable why the Obama government is trying to allot more authority to the Federal Reserve to monitor the functioning of financial corporations and banks. But questions are being raised about the role of the Federal Reserve in containing future foreclosure crisis reruns.

It would be interesting to set the stage to the time of the housing bubble and look back at what those running the show could have done to better the situation.

Alan Greenspan said, in 2004 (he was then the Chairperson of the Federal Reserve) that the increase in real estate market prices was “not enough in our judgment to raise major concerns.” In 2005 Ben Bernanke (he was then an official in Bush government) predicted that a bubble in the housing sector was “a pretty unlikely possibility.” Even in 2007 May he told the officials of the Federal Reserve not to “expect significant spillovers from the sub-prime market to the rest of the economy.”

The fact is that Bernanke and his fellow regulators have yet to explain why their failure in detecting the oncoming bubble should not disqualify them from seeking more power. What ground is there for the Congress or the public to rely on future officials to timely recognize the next signals of danger?

Recently Bernanke attended the annual conference of economists in Atlanta to offer his own account of the past Fed policy undertaken during the bubble. Most of his talk defended the interest rate policy adopted by the Feds. It was only towards the close of his speech that he talked about weak regulations. The solution he suggested was “better and smarter” controls. Not once did he admit that the Feds had been blind to the bubble.

This attitude of not introspecting and finding fault with himself and his department is fueling hostility of the Congress towards the Federal Reserve. However Bernanke’s confirmation for the second term is based on his aggressive and innovative measures taken at the onset of the crisis. The Congress is undecided about expanding his regulatory powers and is also thinking about pushing back the other important measure of the Feds – the fixing of interest rates.

A proposal from Representative Ron Paul (Republican) regarding reviewing by the Congress of decisions on interest rates had once been marginal. But recently it has been passed by the House and would be soon taken up by the Senate.