A summary of Ben Bernanke’s conclusions, from yesterday’s speech.
We must remain open to using monetary policy as a supplementary tool for addressing build-ups of financial risk, but regulation would have been a more effective and surgical tool to combat the house price bubble.
The direct linkages between monetary policy and house prices are weak. Although the most rapid price increases occurred during periods of low short-term interest rates, the price rises seem too large to be explained by rates alone. The most important source of lower initial monthly payments, which allowed more people to enter the housing market, was the increasing use of more exotic types of mortgages and the associated decline in underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary.