Regulatory failure instead of a lax monetary policy bears the responsibility for the American housing bubble that produced the financial crisis of 2008, said Federal Reserve chairman Ben Bernanke this Sunday.

Bernanke rejected accusations that the Fed contributed to the fostering of the recession and argued that the interest rates set by the bank between 2002 and 2006 were appropriately low.

Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates.

“When historical relationships are taken into account,” noted the central banker, “it is difficult to ascribe the house price bubble either to monetary policy or to the broader macroeconomic environment.” Which historical relationships he was referring to, the man who used to scrutinize the causes of the Great Depression failed to specify.

Not too long ago, Bernanke took the blame for the Depression of the 1930s when he admitted that the Federal Reserve was to a large extent responsible for the decade’s hardships. Now he refuses to see that government intervention in the economy and too much rather than too little regulation directly caused the modern-day crisis.

Repeatedly “Wall Street greed” and “inhuman capitalism” are attacked for a recession that started in one of the single most regulated sectors of the American economy: the housing market. The past decade experienced President George W. Bush’s attempt to bring about his “ownership society” and the country today is witnessing the results of this experiment. Through consistent all time low interest rates set by the Federal Reserve and through an enormous increase in size and influence of the government-sponsored Fannie Mae and Freddie Mac enterprises, Washington promoted homeownership by artificially extending credit to people that, put simply, could never dream of affording their own house — let alone pay back their loans.

That is not to say that the private sector is free from blame entirely. But consider that Fannie Mae and Freddie Mac, supposedly privately owned, were publicly chartered and represented the archetype of unfair competition. Consider the Community Reinvestment Act of 1977 that “encouraged” banks to lend to uncreditworthy borrowers and sought to end “discriminatory” credit practices against low-income neighborhoods. And consider that the very banks who let themselves be pressured into participating in this madness were “bailed-out” by the government with billions of dollars of taxpayers’ money. Was this a free market at work?

Bernanke cites “regulatory failure” as responsible for the crisis. In the strictest sense, he is correct. It was the regulator, the very Federal Reserve he chairs, that in part brought about this recession. But instead of identifying the true causes of the turndown and learning from the mistakes made, Bernanke — and much of Washington with him — proposes more regulation to protect the people against the “irrationality” of Wall Street bankers!

Could things have been handled differently? Why, yes. If the chairman of the Fed had indeed examined the “historical relationships” between his institution and the market, he would have stumbled upon the experiences of the Panic of 1907: a major stock market bust that took place before the Federal Reserve System was created and forced many banks and businesses into bankruptcy. Within short time, J.P. Morgan and other New Yorker bankers stepped in to shore up the banking system however, restoring confidence and ending the financial contagion within a month.

Although today’s financial sector is globalized and much more interdependent, the 1907 crisis demonstrated that without a central bank, the market is perfectly capable of taking care of itself. Yes, banks would have failed but such is the norm in a free market: successful businesses that pursue realistic goals by rational means prosper while those that do not go down. What happened last year was the very opposite. Banks that were in part to blame for the financial meltdown were rescued while the ones that had done nothing wrong were left to deal with the blow of a recession that affected the entire market — only without billions of dollars of government aid. So much for “inhuman capitalism”.

Unfortunately, even a the time, the 1907 Panic was not interpreted as proof that the market was best left alone. Rather the government set up the Federal Reserve in spite of the overwhelming economic growth which the United States enjoyed during the unregulated period of 1870-1913. There were however many bank failures during this time, but these must be considered along the many business failures in general — banks were actually less likely to fail than were other enterprises. The number of failures represented no fragile financial sector; they represented a dynamic and growing market in which depositors and creditors handled their money with care exactly because banks could go bankrupt.

In a truly free market, failure is possible and consumers are aware of the risk — with the result that they rationally and voluntarily assume less of it. What the American economy needs is not more government oversight. What is needs is more personal responsibility.