Is Bernanke Insane?

Einstein defined insanity as doing the same thing over and over again and expecting the same results. Again last week the Fed reiterated it is going to keep interest rates near zero and again hinted about more quantitative easing. This has been the Fed’s policy for at least 3 years. During this time housing prices have continued their slow decline, sales have muddled around all time lows and foreclosures continue. But the Fed hasn’t changed its policy.

Why would anyone want to buy a house now? Prices are still going down. It looks like the number of available properties will continue to be high. And there is no need to buy now to lock in a low mortgage rate. So people who have money or people that can qualify for a mortgage can wait for prices to bottom, whenever that will be.

The Fed is trying to keep mortgage rates low with some success but this has not helped the housing market. They are more successful when they try to raise rates. If they raised rates, there may be some incentive to lock in the low rates and buy now even if prices may still drop. And if some families or even investors start buying, maybe we will reach a bottom. Already, in many markets, it is cheaper to buy than rent.

Bernanke, like his predecessor, Alan Greenspan, is afraid to raise rates for fear it may have adverse effects on the frail economy. Greenspan did finally acknowledge his low interest policy was partially responsible for the original housing bubble but raising rates would have had a devastating effect on the economy. So. like Congress, he kicked the can down the road and after his last term expired, the bubble burst. But it didn’t happen on his watch. Bernanke can blame the recession on Greenspan. Economic theory which both learned and taught says you stimulate the economy by lowering interest rates and pumping money into the economy. But this time it is not working and Bernanke needs to do something different. But raising rates probably will hurt the economy in the short term and he doesn’t want to have another recession on his watch. It will also hurt Obama’s chances for reelection.

Bernanke is not insane. He knows the results of his policies. They are not good but they could be worse. Therefore he does the same thing over and over again.


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