Bernanke in 2005: no housing bubble to go bust

Washington Post October 27, 2005Bernanke: There’s No Housing Bubble to Go Bust; Fed Nominee Has Said ‘Cooling’ Won’t Hurt:

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.

Bernanke’s thinking on the housing market did not attract much attention before Bush tapped him for the Fed job Monday but will likely be among the key topics explored by members of the Senate Banking Committee during upcoming hearings on his nomination.

Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump — posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31. Bernanke’s testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.

We now know how that played out. Federal Reserve Chairman Bernanke didn’t see the mortgage meltdown coming, even though it was Fed policy that largely created it. Now he’s in charge of cleaning it up as best he can through new Fed policy. Do you trust his judgement to foresee the effects of those new policies? I don’t.

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