What caused the housing bubble?

In a monthly survey of business economists by the Wall Street Journal, 42 said low interest rates were partly to blame for the housing boom while 12 sided with Mr. Bernanke, who said they weren't. Academic economists who specialize in monetary policy were split in a separate survey: 13 said low interest rates helped cause the housing bubble; 14 said they didn't. Mr. Bernanke laid out his defense of Fed policy in a speech to the American Economic Association last week, acknowledging that interest rates were very low but adding that policy "does not appear to have been inappropriate." Other factors -- notably an explosion of exotic mortgages and a flood of cash coming into the U.S. from abroad -- were the crucial drivers of the housing bubble, he said. "Regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices," he said. The "basic problem" was "the mistake" of raising short-term interest rates too slowly from 2004 through 2006, said Miles Kimball of the University of Michigan. "Going up quicker would have been better."

"The appreciation of house prices was but one of many indicators which called for a somewhat more restrictive interest-rate policy" in 2004 and 2005, said Marvin Goodfriend of Carnegie Mellon's Tepper School of Business. Many economists met Mr. Bernanke halfway -- arguing that low rates played a role in fueling the housing boom, though they may not have been the key force. Some noted that low rates encouraged banks to write the riskier loans that Mr. Bernanke puts at the center of the crisis. "There is plenty of blame to go all around," said Martin Eichenbaum of Northwestern University, expressing a commonly expressed view. "Loose monetary policy certainly contributed to easy financing, which was one element of the bubble."

Chris McLaughlin