The Fed Cannot Do it All

Many wait for Ben Bernanke and his colleagues at the Fed to save the economy from further turmoil. The reality, though, is that monetary policy is limited in addressing the crisis. In particular, the economy is slowing because the housing boom is over, which was caused and fuelled by deteriorating mortgage quality that resulted from people no longer paying their mortgages. The rise in foreclosures followed higher interest rates on resetting adjustable rate mortgages, lower incomes in a weakening labor market, and declining home prices that put many mortgages “under water”. Monetary policy can only directly impact interest rates and even there its reach is limited.