Megan McArdle questions whether Fed policy could have popped the housing bubble. I think that the housing bubble could have been popped easily by putting curbs on loans with low down payments. That could have been done in several ways. First, forbid Freddie and Fannie from doing anything to support low-down-payment mortgages. (Alternatively, rigidly require Freddie and Fannie to hold sufficient capital against the loans. That would have made them uneconomical to buy.) Second, adjust bank capital requirements to get rid of the loophole that allowed these high-risk loans to get low risk ratings when securitized. Third, just issue a warning against the practice.
Bernanke was a member of the Fed starting in 2002, and he could have advocated any of these policies. In my view, he shares with Greenspan any blame for not trying to pop the bubble. ...
In any case, one can argue that if the housing bubble had been popped, the excess risk-seeking funds would have gone elsewhere, creating a different bubble. I still think that the policy of encouraging high leverage in housing, a policy which continues to this day, was wrong.
Monday, November 03, 2008
The housing bubble could have been popped
Alan Greenspan, among others, has argued that the housing bubble could not be popped, even if the Fed wanted to pop it. Economist Arnold Kling disagrees: