The Fed Should Have Taken More Responsibility for the Housing Bubble

As I was searching for something else, I came across this post from July 2005 that I completely forgot I had written:

The Fed Should Take More Responsibility for the Housing Bubble: I didn’t find much in Greenspan’s testimony over and above what has already been noted here previously.  ...

The acknowledgment that incoming data have indicated some downside risk is fairly new. ...  The uncertainties he's referring to are rising input costs, particularly labor and oil, an increase in long-term interest rates, and the potential problems that could cause in the housing market.

It’s interesting to me that the Fed is not taking responsibility for the housing bubble even though monetary policy causing low interest rates had a hand in creating it.  If, in fact, low interest rates have caused a misallocation of resources towards the housing sector such that there are now risks, and there's a case to be made that it has, then the Fed should be more active and forceful in dealing with and forestalling the potential consequences.  That is, if Fed policy has enticed households to make decisions that put them at risk over the long-run, decisions they would not have made if the interest rate were at its natural level, then the Fed has a responsibility to do more than wash its hands of this sector of the economy and say its only role is to clean up after any crash that might occur. ...

Update #1:  Clarifying a bit, I am ready to believe those who say there is no significant deviation from fundamentals and hence less to worry about than if it were a true bubble (except for some areas such as coastal regions), though there are risks and it is the Fed's hand in creating those risks that I am addressing.  Nobody knows for sure how vulnerable this sector is so it is good policy to attenuate such risks to the extent possible.

My complaint is the way in which the Fed has disassociated itself from any responsibility for creating the environment that caused risks to emerge.  For example, the Fed could be more aggressive on the regulatory front in an attempt to ensure that low interest rates do not induce excessive risk taking by households, especially those living near the margin that will be most vulnerable to increases in interest rates.  It's really nice to get people into houses - I'm all for that, one hundred percent - but not if it causes financial distress and years of cleanup afterward (there's that bankruptcy bill thing as well) as households are induced to assume more risk than they can handle.

I suppose in the end we can say it's a free market and people should have known better, that they should have been more forward looking, but when prices are set below equilibrium in an attempt to stimulate the economy, market intervention to manipulate interest rates is present making the fundamentals themselves a result of policy intervention, and that has consequences. ...

Can't say I called the bubble, but I can say I called for caution and 'just in case' action.