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"One risk to the outlook is that the ongoing housing correction might prove larger than anticipated, with possible spillovers onto consumer spending,” Fed chairman Ben Bernanke told the House Committee on Financial Services this morning.

That’s not what he said just two months ago. May 17, in Chicago, at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition. Mr. Bernanke: “We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”

(FYI: I'm in the second half of the video below)

So what changed in two months Mr. Bernanke? Is it the fact that home sales and prices continue to plummet? Is it that home builder earnings read like a Stephen King novel? Is it that housing starts are down almost 20% from a year ago and permits are down 25%? Is it that Bear Stearns now says its two hedge funds that gamble on subprimes have “very little value left”? Is it the fact that there are billboards on I-83 in Pennsylvania from a local home builder there offering to let you live in one of their homes for free for a year, next to another billboard that says “If you’re in trouble with your mortgage, call Jackie at 888-Save My House”???

I just want to know what tipped the balance. Perhaps it’s that the Fed is now on a huge kick with state and local regulators to basically revamp the mortgage industry. “We are conducting a top to bottom review of possible actions we might take to help prevent recurrence of these problems,” Bernanke told lawmakers. I guess if you’re about to go up against the very powerful mortgage bankers and all the Wall Street folks who are so invested in the sector, you’d better lay the foundation that there’s a reeeeally big problem there. Am I right?

For months now, every analyst I talk to, every economist, every academic, says we’re in the early innings of this correction, which has been exacerbated by tightening credit and, more recently, rising interest rates on the 30-year fixed. Foreclosures are rising at a fast clip, and despite the fact that banks and regulators are aggressively trying to help homeowners in trouble, it’s kind of like the horse has already left the barn. What’s done is done, and it has to play out. Mr. Bernanke is finally telling it like it is.

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