Wednesday, December 23, 2009

Bernanke criticized for ignoring housing bubble

Kevin Drum criticizes Fed Chairman Ben Bernanke for being complacent about the growing housing bubble. Nobel laureate Paul Krugman follows suit.


  1. I thought Krugman's criticism was particularly strong, considering his past support and former academic relationship with bernanke.

    "This whole episode makes me think considerably worse of my former department head."

    That's not just an indictment of a single decision or idea, but a blanket downgrade of his opinion and respect for Bernanke's competence.

    But of course this is no surprise, just one more piece of the puzzle falling into place. We all know the vast majority of institutional experts either missed or willfully ignored and denied the bubble. I think Krugman was kinda hoping that his old boss was a little better than most, but has basically been forced to acknowledge he was not. Nice hattip to CR in Krugman's post too. Its pretty amazing how the internet will connect a nobel laureate and a finance blogger.

  2. Krugman has remarked a number of times how much he likes Calculated Risk. Unfortunately, those of us who aren't retired can't post nearly as often as CR does.

  3. Interesting NY Times article about Goldman Sachs and others selling speculative synthetic CDOs (a CDO made up of Credit Default Swaps instead of real assets like mortgages) and then betting against them (unbeknown to the customers who were buying them).

    I like the part about one guy who's firm engaged in this now has a job working for Treasury Secretary Geithner. It reminds me of how President Obama hired Larry Summers who fought against regulation of derivatives in '97, helping trash the career of Brooksley Borne who warned unregulated derivatives could bring down the market.

    "Status quo you can believe in."

    Anyway, it's a good example of what I've said numerous times: the role of investors played can't be ignored. They were eagerly throwing money into the mortgage market, sometimes deceived as much as those who were encouraged to borrow the investor's money (to help make those investment deals a reality.).

  4. For the housing and other markets, there is a theme of 'bubble fatigue' emerging. First, someone has to answer the question whether our current boom/bust cycle is harmful to the common good? Second, would regulating bubbles out of existence (if it can be done) be somehow worse?

    I have many friends who were hurt in this debacle - not investors, folks who just want a place to live. Now they are ruined and face some dark choices.

    One line I've heard is than none of the ruling class wishes to be the one who 'pops the bubble'. I can relate to that, but I say when in charge, be in charge.

    Bubbles are fun, but crashes are devastating.