Bernanke fears that tighter lending standards will delay housing recovery

I can't help laughing when I see stories like this one from Bloombergs. Bernanke thinks that tighter lending standards will delay the recovery in the housing market.

I prefer to see things the other way round. Lax lending standards along with expansionary monetary policy created the housing bubble. If the mortgage market had been properly supervised in the first place, the current housing crisis would have been easily averted. If the Fed had done its job properly, the housing market would have been appreciating at a steady 5 percent year. Housing would have been just another quiet sector of the economy.

Instead, housing suffered from an appalling chain of cheap interest rates, creating a speculative enviroment that led to a few unfortunate years of double digit appreciation. Mortgage lenders didn't care who received loans. The only criteria was whether they could sign the loan docs. What we see now is the clean-up following the party. Yes, "tighter lending" standards will "restrain housing demand". It will restrain demand from people who shouldn't be getting loans to pay for houses they can't afford.

Let's say it again. The simple fact is that the housing crash could have been easily prevented. All that was needed was prudent monetary policy and reasonable oversight of mortgage lenders.

June 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said ``tighter'' lending standards for mortgages will ``restrain'' housing demand for longer than policy makers anticipated.

The Fed chairman said the housing slump hasn't spilled over into other parts of the economy and he maintained a forecast for ``moderate'' growth. Government and industry reports this month showed acceleration in job growth, manufacturing and personal spending and gains in services industries.

``The slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,'' Bernanke said in remarks via satellite to a conference in Cape Town, South Africa. As subprime mortgage lenders make it tougher to get loans, that will ``restrain housing demand, although the magnitude of these effects is difficult to quantify,'' he said.

Fed officials have repeatedly cited housing as a threat to their forecast for faster growth this year. At the same time, they continue to view inflation as the biggest risk, keeping interest rates unchanged since last raising them a year ago. Economists and investors abandoned forecasts for a cut as signs of strength emerged in other parts of the economy.

``We have also seen a gradual ebbing of core inflation, although its level remains somewhat elevated,'' Bernanke said to the International Monetary Conference. ``Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside.''

Minutes of the May 9 Fed meeting released last week noted that the housing recession would continue longer than officials had anticipated. By contrast, Fed officials in January cited ``tentative signs of stabilization'' in home sales.

Home building has fallen for six consecutive quarters, the worst slump since 1991. Residential investment also lopped almost a percentage point off of economic growth in the first quarter. Building permits in April fell to the lowest level in almost a decade, the Commerce Department reported last month. As defaults and mortgage delinquencies increased, lenders made it tougher to get loans.