Federal Reserve Chairman Ben Bernanke has acknowledged that he was in error when he forecast that the subprime-mortgage era, and the resulting credit crunch, would not spiral into the crisis we have today, according to a feature story in the December edition of %{=FONT-STYLE: italic}”
The New Yorker”:http://www.newyorker.com/reporting/2008/12/01/081201fa_fact_cassidy% magazine.
“I and others were mistaken early on in saying that the subprime crisis would be contained,” Bernanke said.
In February of 2007, while many others were already predicting subprime doom, Bernanke testified before the House Budget Committee that he expected moderate growth and that the economy should begin to rebound by the end of 2007. During that hearing, the Fed chairman described the housing slowdown as not “being a broad financial concern or a major factor in assessing the state of the economy.”
As %{=FONT-STYLE: italic}
The New Yorker% reported, Bernanke, working closely with Treasury Secretary Henry Paulson, was determined that if he kept the financial sector operating long enough, it could repair itself – a policy that he and his Fed colleagues referred to as the “finger-in-the-dike” strategy. As recently as Labor Day of this year, Bernanke believed this strategy was working, %{=FONT-STYLE: italic}

The New Yorker% said.
Earlier in the year, we witnessed the fall of Bear Stearns and the collapse of the nation’s largest subprime lender Countrywide. And by mid-summer, the financial tsunami had already begun. In a very short period of time, some of the nation’s largest financial institutions failed or changed structure. In July, IndyMac bank went under. In the month of September alone, we saw: mortgage giants Fannie Mae and Freddie Mac taken over by the federal government, the sale of Merrill Lynch to Bank of America, the bankruptcy of Lehman Brothers, the conversion to bank holding companies by Morgan Stanley and Goldman Sachs, the distressed sale of Wachovia, and the failure of Washington Mutual. The majority of these market-disrupting incidents have been directly attributed to subprime or “lax” lending practices.
And now, Bernanke has admitted his error in miscalculating the impact of the subprime wave. “The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict,” Bernanke said in %{=FONT-STYLE: italic}
The New Yorker% story.
Now, however, it is the Bernanke-led Federal Reserve who may be the agency to pull the housing industry from its slump, with the mortgage support program the Fed unveiled yesterday. Lawrence Yun, chief economist for the National Association of Realtors, said the Fed’s decision to purchase secondary mortgage market debt will bring down long-term interest rates “in a meaningful manner.”
“As we’ve seen in past recessions, home sales rise when mortgage interest rates fall,” Yun said. “If Fed action brings down mortgage interest rates by even 1 percentage point, it would increase home sales by 500,000 units. That should help to draw inventory down and stabilize prices,” Yun explained. According to Yun, only with stabilization in home prices will we see a housing and economic recovery.
To view the full %{=FONT-STYLE: italic}
New Yorker% article on Fed Chairman Bernanke, click here.