Bernanke: Housing Crisis at Heart of Economic Woes
- Jul 15, 2008
Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee today the housing crisis coupled with rising oil prices are “at the heart of the current (economic) uncertainty.” Bernanke (pictured) predicted that the uncertainty would continue until problems in the housing market are stabilized. “The (housing market is) affecting consumer wealth and consumer expectations,” Bernanke said this morning during his semiannual testimony before the Senate committee. “My suggestion in the near term would be to focus on issues related to housing. That’s the most critical and central issue that we face.” While Bernanke was giving his testimony, President George W. Bush was holding a White House news conference and trying to reassure Americans about the economy by saying that while there was slow growth in recent months, “it was growth nonetheless.” Bush spoke about legislation that could help Fannie Mae and Freddie Mac, the U.S.’s two largest mortgage finance companies, both of which have seen their shares drop in recent days as investors worried that the two government-sponsored entities were being hit too hard from losses sustained in the mortgage meltdown. The president urged Congress to act on the proposed legislation, noting that the two mortgage companies play “a central role” in the housing market,” according to a Bloomberg story by Roger Runningen and Catherine Dodge. CPN reported Monday that a temporary rescue plan has been put in place to help the GSEs, which own or guarantee about half of the country’s $12 trillion mortgage market. A more comprehensive plan to help Fannie Mae and Freddie Mac would become part of a housing bill this week. Bloomberg quoted Bush as saying, “The first step is to make sure there is confidence and stability in the mortgage markets.” Those comments echoed remarks made repeatedly by Bernanke as he gave his prepared statement then took questions from the senators. “The best thing that we can do to remove this uncertainty and speed the recovery is to make sure that the housing market and the mortgage financial markets are functioning as smoothly as possible,” Bernanke said. He also called for a “world-class regulator to be able to provide assurance to investors, and to the taxpayer. That’s job one. Then we need to think about what else is needed to make sure they are strong enough financially.” Bernanke said there should be some stabilization in the construction of new homes by the end of the year or early next year. But he predicted housing prices would continue to drop longer than that because of the large inventory. “There is uncertainty about exactly what the equilibrium is that prices will reach. It is that uncertainty that is generating a lot of the stress we are seeing in the financial markets.” The Fed chairman expressed confidence that the housing market would eventually recover but he said expect to see tighter restrictions such as tougher underwriting standards, “more investor due diligence, probably less use of securitization or complicated securitized products.” Bernanke, who at one point took heat from Sen. Tim Bunning, R-Ky., over the Fed’s actions, defended the decision to help arrange JPMorganChase’s acquisition of Bear Stearns. “Our actions with respect to Bear Stearns, with respect to Fannie and Freddie and with respect to the financial system in general are based on our view that financial stability is critical to economic stability. I just don’t accept the distinction between helping Wall Street and helping Main Street. The actions we’ve taken are aimed at helping the overall economy.” Bernanke, though, did note that he thinks the investment banks need more oversight. “I have not proposed a particular agency to do that,” he said. “The key issue is that they have strong consolidated supervision.” Addressing questions about the failure of IndyMac over the weekend, Bernanke said it was the “subprime and other exotic mortgages” that led to the bank’s collapse. He added that in general, “our banking system is well-capitalized.” Bernanke said the Fed is concerned more about banks’ abilities to extend credit than about solvency. Asked whether the U.S. was in a technical recession, Bernanke noted that’s a determination made by economists using technical definitions after the fact, such as employment and industrial production. But he said that whether or not we were in a technical recession, it is a serious situation and people are worried. “The combination of declining wealth, weak job market, rising food and energy prices, foreclosures, tight credit…all those things are putting tremendous pressure on families and it explains why consumer sentiment is low.” Bernanke was to appear later in the day before the same committee with Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox to discuss financial markets. Tomorrow, Bernanke is scheduled to testify before the House Financial Services Commission.