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Bernanke: Housing is Congress’ problem

Image: Ben Bernanke
"That's the Congress' sphere of influence, not the Fed's," Fed Chairman Ben Bernanke said during Capitol Hill testimony when asked about the housing crisis.Susan Walsh / AP
/ Source: Forbes

Federal Reserve Chairman Ben Bernanke's a busy guy. When he's not bailing out Wall Street or guiding the economy, he's modernizing the financial system, and of course, trying not to spike inflation.

No wonder he took a pass this morning when Congress tried to draw him into the debate on the deflating housing market. He declined to endorse any specific plans, and said he supported Congress taking action to stave off unnecessary foreclosures and helping ensure that credit-worthy borrowers can get new mortgages. But as for jumping in? No thanks. "That's the Congress' sphere of influence, not the Fed's," Bernanke answered repeated questioning.

Smart move, says Vincent Reinhart, a scholar at the American Enterprise Institute and a former director of the Fed's Division of Monetary Affairs. "There really isn't anything there that the Federal Reserve can do," he says. "Sometimes the Federal Reserve chairman is there not because he can do something, but to serve a foil. In this particular case, to frame the issue on mortgage relief in a more favorable light."

Congress, meanwhile, is moving swiftly to enact that relief. Senator Majority Leader Harry Reid, D-Nev., and Minority Leader Mitch McConnell, R-Ky., announced that their parties had reached an agreement in principle on a housing bill.

Staffs of Sens. Christopher Dodd, D-Conn., and Richard Shelby, R-Ala., of the Senate Banking Committee, were working to complete a draft of the legislation as soon as Wednesday.

The parties were unable to reach compromise on legislative proposals in February, but the worsening housing crisis prompted them to return to the negotiating table to iron out an agreement upon returning from a recess this week.

Bernanke's testimony Wednesday provided another spur to the discussion. He told Congress that the economy is likely to either grow little in the first half of 2008 or even contract. The short-term outlook had weakened from earlier projections, he said, though he remained positive about the long-term outlook.

Inflation has also been a concern for the Fed — 3.4 percent over the previous year up to February, 2.3 percent higher than the year before — but based off futures markets, which show leveling prices in oil and commodities, the Fed expects inflation to moderate in coming quarters.

Because of market turbulence, the Fed chairman said that uncertainty about his projections was "quite high."

This morning, Bernanke faced a first round of questioning about the $29 billion of Bear Stearns' assets that the Fed added to its balance sheet as part of the rescue. Bernanke expressed confidence that the assets would eventually be sold, recovering the Fed's money, and hinted at the possibility of recovering more than the interest.

Bernanke returns before Congress tomorrow with more questioning about the Bear Stearns deal. Chris Cox, the chairman of the Securities and Exchange Commission and Timothy Geithner, president of the New York Federal Reserve Bank, will also testify.

As testimony about the financial market bailout continues, Congress could enact a mortgage relief bill as early as this week. "The Federal Reserve has perhaps legitimized such aid because of its move with Bear Stearns," said Reinhart. So maybe Bernanke's done enough already.