This quote from Caroline Baum sums things up pretty well about the Fed’s complicity in blowing a massive bubble in housing and in stocks before it.
I know Bernanke has given this issue a great deal of thought and devoted the Fed’s resources to finding the correct answer. Still, the defense sounds like something out of an Ivory Tower, divorced from reality.
The real Fed Funds rate was negative from 2002 to 2005, the longest stretch since the 1970s, a decade notable for high inflation and unemployment. The teaser rates lenders offered on ARMs were pretty close to zero when adjusted for inflation.
When you can borrow for free and invest in an asset whose price can only go up (at least that was the perception about home prices), guess what happens? Credit is misallocated. Lending standards decline. Everyone wants in.
It’s not rocket science, is it? More at the link below.
Source
Bernanke’s Ivory Tower Doesn’t Have a Mortgage: Caroline Baum – Bloomberg