Bernanke on Housing: No Sign of a Rate Cut

Ben Bernanke gave an important speech on subprime mortgages in Chicago today. The whole thing seems balanced and sensible to me: he understands that there's a problem, but he doesn't think it's worth panicking over. He says that the weak housing market "is an important source of" the slowdown in economic growth, and that we're not necessarily out of the woods yet; at the same time, however, he concludes that

given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

Bloomberg says that "Bernanke didn't discuss monetary policy in his remarks," but the speech reads very much to me as though he's saying that the Fed is not going to cut interest rates in response to housing-market weakness. And really there's no other reason to cut rates, given nascent inflation. So my feeling is that hopes for a rate cut any time this year could well end up being dashed.

In general, I'm impressed by Bernanke's laissez-faire approach to the housing market. The problems, including lax underwriting standards, came from the market, and the solutions, including tighter underwriting standards, are also coming from the market. Lenders and borrowers who behaved in a financially irresponsible manner have lost money – that's how markets should work. It's not the job of the Fed to step in and change that. What's more, Bernanke notes that the market itself can provide solutions that the Fed can't:

Even as purchases of securitized subprime mortgages for collateralized debt obligations--an important source of demand--have declined, increased purchases by investment banks, hedge funds, and other private pools of capital are beginning to fill the void.

And nobody cares if they end up losing money on their bets.