Federal Reserve Board Governor Frederic Mishkin again repeated the Greenspan "who could have known" mantra in reference to the housing bubble. In a speech presented yesterday, Mishkin attributed the financial crisis associated with the housing bubble to a breakdown in underwriting standards and distorted incentives, but asserted that: "These problems became apparent only in retrospect. Neither the market nor regulators had sufficient information for evaluating the nature of the risks involved." This is a remarkable assertion. It was easy for those following developments in the housing market to know of the collapse of lending standards even without the special access to the banks' financial status that regulators enjoy. The surge in zero down payment purchases was widely publicized and even celebrated in 2004 and 2005, as was the explosion of the subprime mortgage market. It was also easy to recognize that house prices had diverged sharply from their historic trend with the 70 percent real appreciation over the decade from 1996 to 2006. This sort of disclaimer of responsibility from a Fed governor should be viewed like President Nixon's assertion that he was not a crook. It should be a major topic of investigation for financial and business reporters. The Fed absolutely should have known about the housing bubble and the irresponsible finance that was supporting it. Its incompetence in failing to confront the bubble is big news.
--Dean Baker
