Bernanke: Regulate or CYA?

Weak regulations for Wall Street, not low interest rates, caused the housing bubble, according to Federal Reserve Chairman Ben Bernanke.

In a speech to the annual meeting of the American Economic Association on January 3, Bernanke delivered a highly technical defense of the Fed's handling of events leading up to the housing and financial crisis. The cover-your-backside speech came as Bernanke battles to keep his job and preserve his agency's power.

The Federal Reserve, which Bernanke has headed for the past four years, has been accused of fostering the housing bubble through its policy of maintaining rock-bottom interest rates and by looking the other way as lenders and borrowers alike piled on risk.

Now, Bernanke is leading the parade on financial industry reform. He singled out "the increasing use of more exotic types of mortgages and the associated decline of underwriting standards," rather than monetary policy, as the underlying cause of the bubble, concluding that "the best response to the housing bubble would have been regulatory, not monetary."

A chastened Bernanke listed the Fed's attempts to regulate the housing bubble, which included issuing non-binding "guidance," but also admitted that more should have been done. "The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter," he said.