… this is the invisible hand at work (as presently defined). It’s very depressing.

First of all, the Fed has an ideological bent that has massive consequences on the people of this country. Alan Greenspan’s inability to see past his belief in the world as described by Ayn Rand nearly ran our economy off of a cliff. At the end of it all, saying, “Oops, I’m fallible” doesn’t quite wash with me. Economists should no longer be given the luxury of power without the responsibility of accountability.

If a doctor makes an error in judgment, a person could die. If an economist does, millions could suffer or die. We don’t even have to take an oath. So, yes, I think political oversight (what you might call second-guessing if you were inclined to poison the well) is justified.

Bernanke’s statements are disconcerting to me. Allow me to explain why:

According to the Case-Schiller Index (which indexed at 2000), housing prices increased to 146% (of the 2000 index – “I”) by 2004, peaking at 189% I in 2006. So, can we explain that through normal market action?

The main demand drivers for housing are two: population and household income.
The primary supply driver is the housing stock.

If we just look between 2000 and 2004, population growth was around 1.5%, while income per capita declined by 3%, creating an average income per household decline of 1.4%. (Source: New York Times) These aren’t major shifts, but should have resulted in an overall lessening of demand (the total money chasing the market declined).

According to the normal model, then, supply must have been decreasing substantially to suggest such a massive increase in price, right?

In 2000 we had ~115 million units of housing. The rate at which new units were being added to the market changes from ~1.5 mil homes/year (in 2000 – 2001) to ~2.2 mil homes/year (2004 – 2005). So, while apparent demand was being driven down, supply was being driven up. But prices were increasing. This seems to imply that either economics stopped working or that there’s something big influencing the market, right?

At this point one might suggest someone should have noticed this complete reversal of normal market behavior in 2004 – but it’s easy to point fingers after the fact, so I digress.

The most likely explanation for this seems to be that demand was going up because financing was getting easier. Lending standards kept declining, allowing more and more people to take on more and more debt. Bernanke chocks this up to a lack of regulation. This is true, but it’s not the whole story – and I don’t think it’s fair to stop there.

Prior to this time period the Fed was lowering interest rates substantially under Greenspan, and as a result t-bill prices reached all-time lows. This had two major effects:

First: Banks could easily borrow from the Fed, allowing them to lever up into profitable markets.

Second: Asian surpluses and U.S. investors, turned off by low yields on t-bills (1%), start looking to Wall Street for good returns.

Taken together, these two things meant that Wall Street was being given massive incentives to take big risks while looking the other way. The Gordon Gecko’s came out of the woodwork because we started rewarding them.

So, Yes, investors were pressuring banks to find newer ways to invest their money. Yes, banks were taking risks and making more and more opaque financial products, leveraging themselves 30 to 1. But these are direct, measurable results of the Fed’s monetary policies, not unrelated happenings.

Maybe I’m not qualified to make this statement (and please correct me if I am blatantly wrong) but it seems completely ludicrous for anyone (even Bernanke) to argue that monetary policy was not the primary driver of the housing bubble.