Economists: Bernanke Rate Theory Is Wrong

Wednesday, 20 Jan 2010 01:42 PM

By Dan Weil

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Economists aren’t buying Federal Reserve Chairman Ben Bernanke’s argument that the Fed’s low interest rates early last decade didn’t contribute to the financial crisis.

In a recent Wall Street Journal survey of top economists, 42 said low rates contributed to the housing bubble, while 12 said low rates didn't contribute.

In recent congressional testimony, Bernanke said, "Regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices.”

But economists weren’t swayed.

The basic problem was the mistake of raising short-term interest rates too slowly from 2004 through 2006, Miles Kimball of the University of Michigan told the Journal.

"Going up quicker would have been better."

Low rates weren’t the only factor behind the financial crisis.

Allen Sinai, chief economist at Decision Economics, offered these reasons to the Journal: "Low interest rates, financial innovations in mortgages, lax regulation, and speculative euphoria."

But Bernanke is wrong for trying to take low Fed rates out of the equation, economists say.

“The evidence is overwhelming that those low interest rates were not only unusually low, but they logically were a factor in the housing boom and therefore ultimately the bust,” Stanford University economist John Taylor told Bloomberg.

Dean Baker, co-director of the Center for Economic and Policy Research, agrees.

“Low rates certainly contributed to the crisis,” he told Bloomberg.

“I don’t know how he can deny culpability. You brought the economy to the brink of a Great Depression.”

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