I think a couple things can be said:
1) Rates were too low, and the Fed should have known better
2) There were bigger problems going on than just low rates
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WASHINGTON (MarketWatch) - The Federal Reserve had a role in inflating the housing bubble, but it wasn't low interest rates in the U.S. that fueled speculation in housing around the globe, Fed Chairman Ben Bernanke said Sunday.
Rather, it was lax supervision of toxic mortgages by the Fed and other bank regulators -- along with excessive flows of capital around the globe -- that inflated the bubble, setting up the world economy for what may have been the worst economic crisis in modern history, Bernanke said.
Read full text of his speech.
In twin speeches at the annual meeting of the American Economic Association in Atlanta, Ga., Bernanke and his vice chairman, Donald Kohn, responded to critics who suggest that the Fed's policy of very low interest rates from 2001 to 2005 was the major cause of the housing bubble.
"The magnitude of house-price gains seems too large to be readily explainable by the stance of monetary policy alone," Bernanke concluded in his speech. Comparisons with other major economies shows that countries with relatively higher interest rates had larger housing bubbles, he said.
Bernanke conducted a kind of post-mortem on the housing bubble. Using historic relationships, he concluded that low interest rates were responsible for about 5% of the change in housing prices, while greater global capital flows explained about 30% of the change.
The biggest cause of the bubble was exotic mortgages and the decline in underwriting standards, he said. Buyers were able to lower their initial monthly payments, which allowed prices to soar to unsustainable levels.
"Both lenders and borrowers became convinced that house prices would only go up," Bernanke said. "Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages. For a time, rising house prices became a self-fulfilling prophecy, but ultimately, further appreciation could not be sustained and house prices collapsed."
"That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary," Bernanke said. "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."
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The first commenter (who was voted down) said:
I tend to agree with the following statement: "The biggest cause of the bubble was exotic mortgages and the decline in underwriting standards, he said. Buyers were able to lower their initial monthly payments, which allowed prices to soar to unsustainable levels."
At the time, I was getting offers at least 3 times a week to "refinance" with a beginning rate of 1%. I've been in the business of investing in RE for almost 20 yrs. and I KNEW BETTER. I knew that these kind of ARM loans would be "negative amortization" type loans. But the average person who took out these loans did not have the knowledge that I did. They were duped into taking out the loans and didn't understand what the ramifications would be (i.e. additional principal added to the back-end of the loan, over time). While I agree that they should have consulted with an Attorney before signing for these loans, I think many of them just took the loan officer's word for it (i.e. that they could refi the loan later, when the property went up in value).