Parry and Thrust

So, we have heard from Ben Bernanke again. As in the past, he has absolved the Fed from any responsibility for the current economic mess. Here's the quote:

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Mr. Bernanke, whose nomination for a second term awaits Senate confirmation, said in remarks to the American Economic Association.

He has a point, because the Fed is really responsible for the regulation of national banks and setting monetary policy and not direct supervision of the capital markets. But, let us not lose sight of the fact that Bernanke was a member of the Open Market Committee and as such, should have seen, along with the rest of the Board, the very simple relationship between median income and median home prices in the markets. The fact that some three trillion dollars was running through the mortgage market in 2006 should have raised concern - ABSOLUTELY! That it did not is the reason why we are here. OOPS, that would be blame, and we can't have that, can we?

So, who is to blame? We know, that it's not the Fed, because Bernanke just said that it was not. It is also not the Congress because they did a superlative job of supervising the GSE's and removing any accounting obstacles that relate to reporting by the company's that issued the derivatives that didn't cause the mess. It also couldn't be the Wall Street firms that caused it, because, after all, the securities were rated. It also could not be Fannie Mae and Freddie Mac because companies that employ leverage of greater than 100 times are really well managed and the decision makers are really smart and very conservative and really understand risk. Also, it definitely was not the rating agencies, because, they too really understand risk and know a AAA security when they see one. It was also not the SEC because we all know, that their supervision of FASB was right on the money and definitely NOT influenced by the Congress and Congress was, in turn, NOT influenced by K Street. It also was not the mortgage bankers because they really know how to underwrite and would never, under any circumstances, put a bad credit risk in a house that they could not afford. It's also not the Realtors because we all know that the affordability index is a really well constructed economic indicator and that they would never publish it if it were not. WAIT! I think I figured it out ... it was the housing market itself! It had the absolute cheek to stop going up in price.

What else could it possibly have been?