News Flash: Bernanke is an Idiot

The Kaplan Test Prep Company Washington Post actually does some reasonably good news gathering now and again, even if their OP/EDs are complete crap.

Case in point is this history of the Federal Reserve's mis-steps in dealing with the housing bubble and the related sub-prime debacle.

Their lede is a speech that Bernenke gave in 2007, where he, "Assured the bankers and businessmen gathered at the Westin Hotel on Michigan Avenue that their prosperity was not threatened by the plight of borrowers struggling to repay high-cost subprime loans," because, most banks were not involved at all with sub-prime lending, which was false, and transparently so:

He was wrong. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed. Even as Bernanke spoke, the spillover from subprime lending was driving the banking industry into a historic crisis that some firms would not survive. And the upheaval would shove the economy into recession.

Just as the Fed had failed to protect borrowers from the consequences of subprime lending, so too had it failed to protect banks.

(emphasis mine)

So, it's clear that the Fed, and Ben Bernanke were clueless, but it gets worse:

A warning ignored

In January 2005, National City's chief economist had delivered a prescient warning to the Fed's board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.

The message wasn't well received. One board member expressed particular skepticism -- Ben Bernanke.

"Where do you think it will be the worst?" Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists.

"I would have to say California," said the economist, Richard Dekaser.

"They have been saying that about California since I bought my first house in 1979," Bernanke replied.

This time the warnings were correct, and the collapse of the California real estate market would bring down the nation's fourth-largest bank, the largest casualty of the financial crisis.

(emphasis original)

This is egregious enough that one of Bernanke's most stalwart supporters, Paul Krugman calls him out, with charts:

The point is that there was indeed a huge CA bubble in the 80s, which burst painfully. Nor was this an obscure bit of knowledge: in fact, people like Calculated Risk and yours truly were quite explicitly using the great California bubble of the 80s as a model for what was going to happen nationally.

This whole episode makes me think considerably worse of my former department head.

(emphasis mine)

Bernanke was saying that there had never been a housing bubble and crash in California, despite the fact that there had been one that popped and bottomed out just 10 years before.

This man should not be in charge of a pastry shop, much less the Federal Reserve Bank of the United States of America. I'm not sure how he even became the head of the econ department at Princeton....He seems far to feckless for that.