Federal Reserve Board chairman Ben Bernanke continues trying to sell a story nobody's buying: that the historically low fed funds rate throughout the past decade did not lead to the real estate bubble. Here's the relevant portion from his exchange yesterday with Rep. Ron Paul (R-Texas) at a House Financial Services Committee hearing:
Ron Paul: During the early part of the decade a lot of the free market economists would be saying interest rates were kept too low too long and there was a financial bubble and a housing bubble. There had to be a correction. And of course we did in 2008. Since 2008 many of the mainstream economists have more or less agreed with that assessment, because frequently we'll hear them say, "Interest rates were held too low too long." And I think even Secretary Geithner has made that statement. Where do you come down on that perception? Do you think interest rates were held too low too long?
Ben Bernanke: Well Congressman, I've given a speech on this.
And I think the bottom line is that nobody really knows for sure but that the evidence is really quite mixed.
And I would say that even if they were too low for too long, the magnitude of the error was not big enough to account for the huge crisis we had. I think what caused the crisis was the failures of regulation. And I would fault the Fed here too, because some of those failures were ours in the sense that we didn't do enough -- and I've admitted this and acknowledged this many times -- we didn't do enough on mortgage regulation. So I think it was the weakness of the regulatory system, not monetary policy that was most important here.
Ron Paul: Of course I don't agree with that.
But if you assume for a minute that it was too low too long and you had perfect regulations, what is the harm done by interest rates being too low too long? Do you see any damage from interest rates being artificially low for a long period of time? Sort that away from regulations for a second.
Ben Bernanke: Well certainly one possibility which [former Fed chairman Paul Volcker] knows a lot about is that if you keep rates too low for too long you'll get inflation. And every central banker wants to be sure that the price level remains stable. And that's an important consideration.
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http://reason.com/blog/2010/03/18/be...erest-rates-st
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