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Part I: "It's All Academic"
Part II: "Ignorance is Bliss"
Part III: "Misidentifying the Cause, Misdiagnosing the Cure and Doing More Harm than Good”


Bernanke’s record-setting interest rate cuts failed to accomplish his stated goals, but they did further destabilize the economy, exhaust one of the Federal Reserve’s primary monetary policy tools and degrade confidence in the organization. 

Undeterred by the realization that reduced interest rates had a negligible effect on the collapsing Housing Market, Bernanke devised a new mechanism to more directly manipulate mortgage rates. 

On November 25th 2008 the Federal Reserve announced a plan to spend $600 billion on open-market purchases of mortgage securities.  The intent of the program was to lower mortgage rates and stabilize housing prices.

Federal Reserve Press Release – 11/25/08
“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”

Again, Mr. Bernanke clearly demonstrated a fundamental lack of understanding with regard to the economic crisis.  Low mortgage rates have nothing to do with solving the housing collapse or alleviating the broader financial downturn.  (For a more detailed understanding please review “Mortgage Rates do Not Matter” posted November 2008 in response to the announcement that the Federal Reserve planned to manipulate mortgage rates)

When over-priced, over-leveraged assets are depreciating in value, reasonable people will not borrow large sums of money at any interest rate to buy these assets if further price declines are anticipated.  This is why deflation is potentially debilitating and self-perpetuating.

The truly interesting thing is that Bernanke understands this phenomenon as well as anyone.  His mortal fear is deflation.

What Bernanke appears unable to grasp is that a primary difference between The Affordable Mortgage Depression and The Great Depression is that this time around asset price deflation was inevitable.  The realities of over-priced/over-leveraged housing, a dramatically altered environment for financing home purchases (unrelated to interest rates), changing perceptions of risk, expectations of continued price declines, and the inevitability of market forces dictated that prices must fall precipitously.  Bernanke might as well have been attempting to change the Laws of Physics through his interest rate cuts and mortgage rate manipulations. 




Bernanke succeeded in distorting mortgage rates. 



But failed to accomplish the intended goal of stabilizing housing prices.  

Even worse for Bernanke, mortgage rates have recently increased back to December 2008 levels.  The market recognizes that the Federal Reserve can not distort mortgage rates forever, is concerned by the Government's rapid accumulation of debt and is fearful of general price inflation resulting from reckless monetary policy. 

Bernanke's mortgage rate manipulation has been an abject failure.


Part V:  “Bernanke Hits the Panic Button”