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Ben Bernanke needs to be careful. Over the weekend, the Fed Chairman gave a speech where he essentially said loose monetary policy between 2001 and 2005 was not to blame for the housing bubble that sank the stock market and nearly crushed the U.S. economy.
Instead, Bernanke says it was the proliferation of "exotic" mortgages and a general belief that housing prices could only go up that were to blame.
Sure, there was a lot of hubris, deception, and outright fraud by lenders and borrowers that were the hallmarks of the bubble itself. It’s also true that stricter regulation and oversight would have prevented some of the specific abuses, as Bernanke insists. But when Bernanke denies that low interest rates were a pre-condition for the housing bubble, he is simply ducking any responsibility.
In the words of Morgan Stanley’s Stephen Roach: "I think it’s ludicrous to think that monetary policy didn’t play any role in causing the so-called subprime crisis…I think we need to take a very careful look at monetary policy and central bankers who do not believe that interest rates played a role in this crisis…I think that view is dead wrong."
There’s simply no doubt that Alan Greenspan’s monetary policy laid the foundation for the housing bubble. Interest rates are like a risk assessment. When they are low, the Fed is inviting investors borrow, or take on risk. When interest rates are high, risk (borrowing) is discouraged by higher costs. It’s as simple as that.
Bernanke has done a lot to help the U.S. economy recover. But he’s now risking all credibility by aligning himself with Greenspan’s failed beliefs about monetary policy.
*****Ever the optimist, I’m going to assume that Bernanke has a good reason for trying to minimize the relationship between interest rates and asset bubbles. Perhaps he is trying to strengthen the case for regulatory reform. Or maybe, by insisting that low rates don’t lead to higher home values, he hopes to preserve the nascent recovery in the housing market as he raises interest rates (if low rates didn’t cause higher prices, the higher rates won’t cause lower prices.)
Whatever the reason though, Bernanke sounds out of touch with reality on this one.
*****As investors, you and I must watch for the profit angle here. If Bernanke’s priming the market for higher rates, we’ll need to be on our guard. If Bernanke is trying to justify prolonged low rates, we’ll need to watch for the ensuing asset bubbles for profit opportunities.
Commodities would be the most obvious place to look should the later scenario play out, and oil and gold investments would top my list. I’ve just recommended a $1.20 oil exploration stock that’s sitting on what could be a truly massive find. You can get the details here.