Bernanke: Housing, credit woes will linger

Given all the problems faced by the economy, the economic performance so far this year “has been reasonably good,” Bernanke said.

On the inflation front, Bernanke noted that the prices of crude oil and other commodities have been rising and that the value of the dollar has weakened. Oil prices galloped to a record high of $86.13 a barrel on Monday.

Bernanke said the Fed will continue to monitor inflation developments carefully. Yet, with the limited information seen since the central bank’s September meeting, the inflation barometers “are consistent with continued moderate increases in consumer prices,” he said.

Fielding questions after his speech, Bernanke said, “Part of the reason that we have some confidence in inflation remaining well controlled is we expect to see the economy growing more slowly at the end of this year” and early next year.

The Fed’s September rate reduction, Bernanke said in his speech, has helped ease “some of the pressure in financial markets, although considerable strains remain.” He said Fed policymakers were prepared to “reverse” the rate reduction if inflation turned out stronger than expected.

The Fed’s next move will be determined by what is best for the economy, Bernanke suggested. As he has said previously, it is not the Fed’s job to shield investors from the consequences of bad financial decisions.

“The truth is that it (the Fed) can hardly insulate investors from risk, even if it wished to do so,” Bernanke said. “Developments over the past few months reinforce this point. Those who made bad investment decisions lost money.”

The worst carnage has affected investors in “subprime” mortgages — those made to people with spotty credit or low incomes. Some lenders have been forced out of business and some investors in those and related mortgage-backed securities have taken a huge financial hit.

Asked about what financial or economic information he would like to have but doesn’t, Bernanke responded, “I’d like to know what those damn things are worth,” referring in general to complicated financial instruments that repackaged debt — bad debt, in some cases.

Overstretched homeowners with subprime loans got clobbered by the mortgage meltdown, too. Foreclosures and late payments have soared.

Weaker home prices seen during the housing bust have made it more difficult for some subprime borrowers to refinance out of loans that offered low “teaser” rates but jumped to much higher rates, resulting in payment shocks. Delinquencies on these mortgages are expected to rise further, Bernanke predicted.

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