Analysis: Fed Bearing Brunt of Blame

It helped make homeownership a tempting prospect for many.

As Greenspan began raising rates again in 2004, followed by more increases after Bernanke took over in early 2006, many homeowners found themselves suddenly caught in the closing jaws of tumbling home prices and increasing mortgage payments.

But the White House and Congress also had a hand long promoting the glories of home ownership and encouraging more and more Americans to become homeowners.

Remember President Bush's "ownership society?" that put heavy emphasis on wider home ownership?

In the 1990s, Congress passed and Democratic President Clinton signed legislation that repealed the Depression-era Glass-Steagall Act. It meant that investment banks, brokerages and insurance companies could compete with traditional banks but without facing the same regulations.

Then there is the cherished income-tax exemption that homeowners receive for interest paid on mortgages, whether for a primary residence or a vacation home. As an added incentive, Congress in 1997 expanded the tax break that homeowners can get when they sell their homes, allowing the first $500,000 of a house's appreciation to be exempt from capital-gains taxes.

Much earlier, Congress set up government sponsored enterprises mortgage-finance giants Fannie Mae and Freddie Mac to help funnel money into mortgage markets.

Still, "You have to put the onus to some extent on the Fed in the first place," said economist Lawrence Chimerine, president of Radnor Consulting in Philadelphia. "They raised short-term interest rates far too much a year or two ago, then were too slow in starting to reduce them. Secondly, they were out to lunch on their responsibility for overseeing mortgage markets, particularly for single-family mortgages."

The nation's central bank only started slashing interest rates late last summer, a few months after the economy began to wobble. Since then it has dropped the key rate that it controls a full 3 percentage points from 5.25 percent to 2.25 percent.

David Jones, chief economist at DMJ Advisors and a longtime Fed watcher, agreed that Bernanke "tended to lag behind in dealing with the crisis. But in January, he began to recognize how serious it was. And in his remarks to Congress this week, he minced no words. He has to be given credit for being a fast learner on the job and taking the action that kept us from falling into the abyss in a total credit-market meltdown."