Bernanke's Speech to the AEA

In a speech to the American Economic Association, the Fed Chair said the following - "All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis and to cushion the effects if another crisis occurs." The speech also had the following ""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." If the Chairman actually believes that, I am not sure he should be re-confirmed for a second term.

The two charts took about two minutes to find. Anyone who has watched the financial crisis with even mild interest knows that beginning in the early 1990s the leveraging of the two government sponsored enterprises (Fannie Mae and Freddie Mac) increased dramatically. Those leverage ratios increased in part because Members of Congress demanded that those two entities do more to increase lending to "non-traditional" borrowers. The result of this and other policies, including the relative liquidity in the monetary system, produced some rather expected results. Loan to value standards went out the window. The numbers of mortgages with little or no documentation increased by huge numbers. In essence all this policy netted up demand for housing by a tremendous amount. At the same time, the average borrower also leveraged up. All those trend lines helped to create the bubble that is presented so well in the chart out of the Chairman's speech.

Regulations in this case helped to build the bubble. And lack of significant response by regulators to the nonsense of politicians who were trying to build constituencies by giving housing away was deafening. Regulatory structures can always be improved but arguing that the future bubbles will be prevented by more technocrats is silly.