Bernanke Critical of Fed's Response to Bubble

Atlanta, GA, Jan. 4, 2010--Tighter regulation would have been more effective than raising interest rates at curbing the housing bubble, Federal Reserve Chairman Ben S. Bernanke said.

“The best response to the housing bubble would have been regulatory, rather than monetary,” Bernanke said yesterday in remarks to the American Economic Association’s annual meeting in Atlanta.

The Fed’s efforts to constrain the bubble were “too late or were insufficient,” which means that regulatory actions “must be better and smarter,” he said.

Also at the conference, Fed Vice Chairman Donald Kohn said that tight bank credit and caution among households and businesses may impede spending amid an improvement in financial markets.

“Households and businesses and bank lenders remain very cautious, and the odds are that the pickup in spending will not be very sharp,” Kohn said.

Bernanke said increased use of variable-rate and interest- only mortgages, and the “associated decline of underwriting standards,” were more responsible for the bubble than low rates.