Bernanke Challenged on Rates' Role in Bust

Source: WSJ

Federal Reserve Chairman Ben Bernanke says low interest rates engineered by the Fed in the early 2000s aren't to blame for the housing boom and bust. But he hasn't convinced fellow economists.

Two surveys conducted by The Wall Street Journal this week found many economists believe low rates did contribute to the bubble.

In a monthly survey of mainly Wall Street and other business economists, 42 said low interest rates were partly to blame for the housing boom while 12 sided with Mr. Bernanke and said they weren't. Academic economists who specialize in monetary policy were split in a separate survey: 13 said low interest rates helped cause the housing bubble; 14 said they didn't.

It is more than an academic argument. Fed officials have been trying to understand what went wrong last decade to avoid repeating it. In addition, lawmakers are weighing whether to give Mr. Bernanke a second term and whether to bolster or restrain the Fed's power as a financial regulator.

The Fed pushed its benchmark federal funds interest rate -- at which banks lend to each other overnight -- to 1% in 2003 when Alan Greenspan was Fed chairman and Mr. Bernanke was a member of the Fed board. With the economy weak and deflation a concern, the Fed pushed rates up gradually beginning in 2004. Mr. Bernanke became chairman in 2006.

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