As the United States’ worst housing market bust since the Great Depression raises the specter of a nasty recession, a serious reappraisal of Alan Greenspan’s 17-year chairmanship of the Federal Reserve is under way. Justified as this reappraisal might be, it should not be allowed to detract from Ben Bernanke’s role in today’s U.S. housing market debacle, especially since Mr. Bernanke assumed the Federal Reserve chairmanship in February 2006 a full year before the worst of the subprime lending excesses were to be made.

To be sure, Mr. Greenspan must assume the major part of the responsibility for having sown the seeds of the largest U.S. housing and credit market bubbles in the post-war period. He did so in part by lowering interest rates to abnormally low levels in the aftermath of the 2001 bursting of the NASDAQ bubble and then by maintaining interest rates at artificially low levels for far too long. ...

While one has to sympathize with Mr. Bernanke’s present predicament, which is hardly of his own making, one has to ask why was he as passive as he was in 2006 as the worst of the subprime loans were made under his watch. During that year, a total of around US$600 billion in subprime mortgage lending, or around one half the total amount of subprime lending presently outstanding, was made on conditions that were materially more lax than earlier vintages of sub-prime lending. ...

Mr. Bernanke also needs to be held accountable for totally misjudging how serious would be the bursting of the housing market bubble and how large would be the losses to the financial system from imprudent subprime lending. In April 2007, when he first identified that something was amiss with sub-prime lending, he assured Congress that the subprime problem would be limited in size and that any fallout would be confined to the housing sector. ... Mr. Bernanke’s misjudgment of the severity of the housing bust blinded him to the need for early and decisive monetary policy action. ...