Bernanke: There's No Housing Bubble to Go Bust Fed Nominee Has Said 'Cooling' Won't Hurt By Nell Henderson Washington Post Staff Writer Thursday, October 27, 2005; Page D01 Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve. U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households. Ben S. Bernanke testified on Capitol Hill just before being nominated to succeed Fed Chairman Alan Greenspan. Ben S. Bernanke testified on Capitol Hill just before being nominated to succeed Fed Chairman Alan Greenspan. (By Ron Edmonds -- Associated Press) Ben S. Bernanke On Monday, Oct. 24, 2005, President Bush nominated Ben S. Bernanke, chairman of the president's Council of Economic Advisers, to succeed Federal Reserve Chairman Alan Greenspan when he retires in January. Bernanke's thinking on the housing market did not attract much attention before Bush tapped him for the Fed job Monday but will likely be among the key topics explored by members of the Senate Banking Committee during upcoming hearings on his nomination. Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump -- posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31. Bernanke's testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown. "House prices are unlikely to continue rising at current rates," said Bernanke, who served on the Fed board from 2002 until June. However, he added, "a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year." Greenspan has said recently that he sees no national bubble in home prices, but rather "froth" in some local markets. Prices may fall in some areas, he indicated. And he warned in a speech last month that some borrowers and lenders may suffer "significant losses" if cooling house prices make it difficult to repay new types of riskier home loans -- such as interest-only adjustable-rate mortgages. Bernanke did not address the possibility of local housing bubbles or the risks faced by individual borrowers or lenders in a slowing market. But if Bernanke is confirmed as Fed chief, and if the housing market slows more than he expects, he would be unlikely to use the central bank's power over short-term interest rates to prop up falling housing prices for the sake of individual homeowners, according to comments he has made in numerous speeches and statements in academic papers. Rather, he has argued for many years that the Fed should respond to rising or falling prices for stocks, real estate or other assets only if they are affecting inflation or economic growth in an undesirable way. Thus, he would advocate cutting interest rates if a reversal in the housing market sharply dampened consumer spending, triggering job losses or a fall in inflation to very low levels. Lower interest rates encourage consumers and businesses to borrow and spend, spurring economic growth and hiring. That would also make it less likely that very low inflation could turn into deflation, an economically harmful drop in the overall price level. Bernanke believes "the Fed's job is to protect the economy, not to protect individual asset prices," said William Dudley, chief economist for Goldman Sachs U.S. Economics Research.