The problem of the sub-prime MBS were known already to the public at the end of 2006. It is not hard to suppose that it was known before to the Federal Reserve System.In fact several month before as that Market was not transparent to say the least.
Google Trends on "Sub Prime".
Wells Fargo buying more 'sub-prime' mortgagesLos Angeles Times - Dec 5 2006
Goldman trims sub-prime riskIndependent - Mar 14 2007
Uncertainty shrouds sub prime situationMoneycontrol.com - Aug 10 2007
Sub-prime crisis claims further scalpAboutProperty.co.uk - Nov 5 2007
Swan upbeat about sub-prime falloutFairfield Champion - Dec 6 2007
Bank of China hit by sub-prime woesThe Australian - Jan 22 2008
Knowing that such a risk existed, according to his speeches and his book,
Bernanke should have lowered the short-term rates before December 2006.
It is only on September 18th, 2007 that Ben 'Systemic Risk' Bernanke lowered the target
fed fund rate from 5.25% by a mere 0.50% to 4.75%!
On March 5th, 2009 the 30 Years US Treasury Bond yield went as low as 4.621%.
It went as low as 4.617% on September 10, 2007!
On December 11 He lowered the target for Fed Funds by ridiculous 0.25%
When on December 4th the yield on 30 Years US Treasury Bonds were 4.309%.
On January 31 he raised the target to 4.25%. When on January 23, 2008 t
he yield on the 30 Years US Treasury Bond was as low as 4.102%!!!
"Among the more important monetary-policy mistakes were
1) the failure to tighten policy during 1987-89, despite evidence of growing
inflationary pressures, a failure that contributed to the development
of the "bubble economy";
2) the apparent attempt to "prick" the stock
market bubble in 1989-91, which helped to induce an asset-price crash;
and 3) the failure to ease adequately during the 1991-94 period, as
asset prices, the banking system, and t
he economy declined precipitously.
Bernanke and Gertler (1999) argue that if the Japanese
monetary policy after 1985 had focused on stabilizing aggregate demand
and inflation, rather than being distracted by the exchange rate or
asset prices, the results would have been much better.
....
I will argue here that, to the contrary, there is much that the Bank of Japan,
in cooperation with other government agencies, could do to help promote economic recovery in Japan.
Most of my arguments will not be new to the policy board and staff of the BOJ,
which of course has discussed these questions extensively.
However, their responses, when not confused or inconsistent, have generally relied on various technical or
legal objections- objections which, I will argue, could be overcome if the will to do so existed."
