Federal Reserve Chair Ben Bernanke is appearing before the Financial Crisis Inquiry Commission today, and he mainly said in opening remarks that too big to fail must be solved. He believes the new resolution authority will provide the opportunity for regulators to wind down firms without taxpayer resources exposed.

But that’s not nearly the most notable part of his remarks today. No, that gets reserved for Bernanke’s past performance during the housing bubble. He acknowledged the Fed’s failure to crack down on predatory lending, and then absolved his organization from any responsibility for the housing bubble.

Speaking before the Financial Crisis Inquiry Commission this morning in Washington, Federal Reserve chairman Ben Bernanke said if steps could have been taken three years ago to stop the bubble in the economy, which eventually lead to today’s recession, it would not have been a prudent decision to do so.

“Even if monetary policy was not a principal cause of the housing bubble, some have argued that the Fed could have stopped the bubble at an earlier stage by more-aggressive interest rate increases,” he said. “For several reasons, this was not a practical policy option.” [...]

In 2003 and onward, Bernanke said there was no clear consensus about whether the increases in house prices were worrisome. If the Federal Reserve raised interest rates in that time period, the economy would have felt several negative effects to other assets and sectors.

It’s just ridiculous to suggest that there was “no clear consensus” about housing prices. Just look at this chart of housing prices since WWII. For 50-odd years, prices generally fell in a stable range, adjusted for inflation. Then they rose completely off the charts, doubling in value. Only someone who wanted to pretend not to know the damage this would cause the economy when the bubble burst would claim “no consensus.”

As for the Fed’s policy options, yes the blunt instrument of interest rates exists, but because mortgage lenders were dying to get people into these bubble-inflated homes, they broke every rule in the book to fashion lending instruments. And the entity with chief responsibility to stop that was the Federal Reserve. And they didn’t do a damn thing. It’s nice for Bernanke to “acknowledge” this, but he’s essentially saying they abdicated their responsibility. Actual enforcement would have knocked down the bubble significantly. So there’s no conception of the Fed being “powerless” to stop this. They chose not to intervene because it wasn’t profitable for their buddies to intervene.

Alternatively, they could have not encouraged exotic mortgage instruments in public statements. You know, the kind that crashed the bubble.

The fact that Bernanke now stresses regulation as the way to prevent financial crises now, after claiming innocent bystander status on a housing bubble that could have been popped by proper regulation, should make nobody comfortable about the future. Although, a legitimate defender of the people in the role of the consumer protection bureau, which would have jurisdiction over this element of policy, at least would mean less of a reliance on the Ben Bernankes of the world.

UPDATE: Oh yeah, Bernanke also admitted lying to Congress.

He said his testimony before Congress on Sept. 23-24, 2008, which indicated Lehman was permitted to fail because market players had had time to make other arrangements, inadvertently fed “the myth we had a way of saving Lehman.”

Bernanke said he equivocated because he judged at the time that explaining that the Fed couldn’t save Lehman “could have reduced confidence in the system even further,” possibly leading to runs on other financial institutions [...]

As bad as September 2008 was, Bernanke feared he could have made it worse by frankly admitting the Fed had no way of preventing a giant securities firm from unraveling. But he said in retrospect that caution has handed unwarranted ammunition to a large group that contends policymakers let Lehman fail to save face politically.

“I regret not being more straightforward there,” Bernanke said. He said the apparent change in his explanation of Lehman’s failure over the past two years “has supported the mistaken impression we could have done more.”

I’m sure the Justice Department arrest will happen any day now…

UPDATE II: Zach Carter has a great liveblog of the proceedings.