Bernanke says he underrated the impact of mortgage crisis

Federal Reserve Chairman, Ben BernankeAn article in the latest edition of The New Yorker magazine says that the Federal Reserve Chairman, Ben Bernanke, has conceded that he underestimated the impact of the subprime mortgage crisis on the broader financial sector. Clearly, the subprime mortgage crisis sparked the worst financial crisis hitting the world since the Great Depression of the 1930's.

The mortgage meltdown actually began in the United States in the summer of 2007, and rapidly spread to other countries, as well as to other types of lending, affecting even more creditworthy customers.

In an article for the December 1 issue of the magazine, Bernanke acknowledged: "I and others were mistaken early on in saying that the subprime crisis would be contained. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict."

More than a year into the crisis, Bernanke has taken a flurry of unprecedented steps to help bolster the banking system and to get banks to lend money more freely again.

The first of the steps cam in September 2007 when, aiming to protect the economy from damage and help ease Wall Street turmoil, Bernanke and his colleagues cut a key interest rate - the first reduction in four years.

Of late, these efforts of the Fed have taken the form of providing short-term cash loans to banks; letting financial companies swap shunned mortgage securities for super-safe Treasury securities; and buying mounds of short-term debt from a host of companies. It also expanded its emergency lending facilities to investment firms, provided financial backing in JPMorgan Chase & Co.'s buyout of Bear Stearns, and threw a financial lifeline to insurer American International Group.