Are our bankers-in-chief always condemned to crisis management?
Are central bankers always destined to be too late?
This weekend, two of that august fraternity were strutting their stuff. Former U.S. Fed chairman Ben Bernanke was busy promoting his new book called The Courage to Act. Meanwhile, Bank of Canada governor Stephen Poloz was giving speeches titled Integrating Financial Stability into Monetary Policy.
And in different ways, the two tread the same ground: how difficult it is to rein in a housing boom before it turns into a crisis.
The title of Bernanke’s book has already been pilloried for its hubris.
Voices had been raised for years that U.S. interest rates were too low and that it was driving house prices too high, distorting the economy. But as Bernanke admitted in an interview that played Tuesday on CBC Radio’s The Current, he didn’t act until it was far too late.
Greater than housing
“It wasn’t until August of 2007 that we began to appreciate that the ramifications of the losses on sub-prime mortgages were going to be much greater than just the housing market,” Bernanke told The Current host Anna Maria Tremonti.
Of course by that time, there was really little the U.S. central bank could do to prevent the bubble from popping, setting off a global financial meltdown and necessitating a multibillion-dollar bailout of the banks that had contributed to the crisis.
Years of low interest rates had allowed consumers to borrow recklessly. After they had access to that money, they used it to overinflate the entire economy, buying consumer goodies and bidding up the price of real estate.
By then, it was too late to raise interest rates. It could have been done several years previously, slowing the boom before it became dangerous. So why didn’t Bernanke, or his predecessor Alan Greenspan, act then?
There may be clues from listening to our own central banker’s speech this week.
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