When I heard on the news Monday that Fed Chairman Ben Bernanke had given a speech in which he contended that the Fed played little role in the housing bubble that precipitated the financial crisis, I was appalled. I have been influenced by Stanford economist John Taylor's little book making the case that the Fed's departure from the "Taylor rule" on monetary policy was a big factor in the fiasco, flooding the economy with funny money from about 2002 through 2004, and I still think he has a strong case.
I found all the news stories fairly unsatisfactory, so I found a copy of Bernanke's speech (which included more than a dozen pages of charts and graphs) and read and pondered it. I finally decided he has made a case that the Fed's role was less important than is widely believed. It really was more Fannie and Freddie. Bernanke's most telling datum is a reminder that the bubble began expanding in 1999, well before the Fed's post-9/11 expansion, although the expansion accelerated in 2005 -- and Bernanke acknowledged that the Fed probably played a role in that.
I think this Register editorial, in combination with this blog post, summarizes my thoughts fairly accurately.Bernanke made a case, but still unduly downplayed the Fed's role. And his argument that better regulation would better prevent future crises is ludicrous.