Sunday, January 03, 2010

Barnanke 01/04/2009 - Regulation Not Monetary Policy Most Surgical Means to Prevent Housing Bubble

C-SPAN Video Player - Bernanke Calls for Regulation First, then Interest Hikes

This speech by Bernanke is very simple to understand. His speech has two parts to make his ultimate point.
1. He compares the actual target rate with the rate suggested by the Taylor model. He modifies the Taylor Model with consideration as to whether variations in inflation are considered temporary or permanent. IF we make this adjustment then the actual target rate was pretty much in line with teh suggestion of the Taylor Model.
2. He shows that this "good" monetary policy if the only variable in influencing housing prices, we see that housing prices significantly out paced the influence of monetary piolicy (i.e. interest rates). In fact we see that LENDING PRACTICES, appear to have generated the new demand for homes and the subsequent housing bubble. The introduction of proliferation of esoteric products which offer exceedingly low initial payments account for the greatest shift in housing prices and thus the housing bubble.
3. Therefore to avoid the housing bubble, which led to the most significant economic crisis in modern history, the primary cause was LENDING PRACTICES. Therefore, regulation of lenders would have been the most effective tool in avoiding the housing bubble.
4. Therefore, regulation of lending practices must be implemented if we are to avoid a recurrance of the recent economic problems.


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