Bernanke and California
Bernanke's willful blindness about the Golden State's housing bubble.
Binyamin Appelbaum and David Cho have a nice story in the Washington Post today about the Fed's lackadaisical regulation of banks in the decade before the housing bust. It's worth a read. As a native Southern Californian, though, this passage jumped out at me:
In January 2005, National City's chief economist had delivered a prescient warning to the Fed's board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.
The message wasn't well received. One board member expressed particular skepticism — Ben Bernanke.
"Where do you think it will be the worst?" Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists.
"I would have to say California," said the economist, Richard Dekaser.
"They have been saying that about California since I bought my first house in 1979," Bernanke replied.
I suppose that's true. But here's the thing: "they" were right. California went through a housing bubble in the 1980s that burst in 1990. I should know: I bought a house in 1989 and lost $40,000 on it before finally caving in and selling it four years later. In all, it took nearly a decade for housing to regain its pre-bubble value — at which point, a brand new bubble was heating up.
It was myopic enough to believe in 2005 that housing wasn't overpriced on a nationwide basis. But to specifically dismiss concerns about California even though it had been in the trough of a housing crash a mere 10 years earlier? That's just willful blindness.