The Fed could have acted aggressively to try to specifically target the housing bubble.

Since rising house prices were critical to the only major mechanisms through which the Fed was succeeding in stimulating the economy, targeting housing would have been essentially equivalent to raising interest rates. The only difference might have been a weaker dollar, which would have had some stimulus effect on the US but would have aggravated the recessions in Europe and Japan.

And as the leverage on a bubble is stronger, the earlier that you start to fight it, some acts that are mostly symbolic today could have had a substantial benefit if done earlier.

For example, allowing banks to use mortgage loans as collateral for discount loans, as has basically always been done (that is, since the Fed was established) ... but not mortgage backed securities.

Let's not kid ourselves into thinking the Fed was anything but deluded throughout the housing bubble run-up. Clearly Greenspan and Bernanke did not act in a way such as to put a damper on housing prices because they simply did not see the pricing increases as disconnected from fundamentals. Of course, had they bothered to check the actual facts, they would have learned otherwise.

In May of this year - less than four months ago - Bernanke stated that, "Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited".

In other words, despite even Greenspan's earlier proclamations of "frothiness" and localized bubbles, Bernanke STILL did not feel that prices were that out of whack or that the real estate market as a whole would take that much of a hit. In fact, he was still in denial that there was a bubble at all - as recently as May - and he likely is still in denial, at least publicly.

So we can debate all we want about whether putting a damper on prices using the bully pulpit would have caused a recession abroad, at home, etc, but clearly the reason the Fed did not do so was it was either incapable of accepting reality or refused to do so.

This is analogous to a doctor who treats addicts in withdrawal by giving them more drugs. Sure, the patients seem to do great for a while, but inevitably, they will crash.

A rational assessment of the bubble dynamics would have required some sort of intervention by the Fed, either in raising rates or using the bully pulpit, as Dean mentioned. Unfortunately, the Fed was not assessing the situation rationally, nor should we expect Bernanke to do so from here on out. The power of denial is just too strong.

"many of the foreclosures that the country will see in the next couple of years."

Always right around the corner, isnt it? Never this year, even though last year and the year before used to be "next year" way back when.

Could you clarify if housing prices have to fall for this to be considered a housing crash?

Always remember to look at who profits from any event. At the conclusion of this debacle, in 2012, I predict there will be three major banks in the U.S. and they will control 80 percent of the mortgage market, allowing them to dictate mortage origination fees.
Housing prices will more realistically mirror real world wages, and the banks themselves will act to assure stability in the market, in order to protect the assets which they are holding (titles to the houses) and they will profit handily from increased fees. It may seem to be "unfair," but far better than the current situation.

This is not a big issue. It's very simple. Buying a house? Buy and learn how to use a calculator!

Any other part of this issue is good only for the election.

Limp: "This is not a big issue. It's very simple. Buying a house? Buy and learn how to use a calculator!"

SG: (R)ight!

And the victim of crime!? We don't need no stinkin' Cops ... just buy and learn how to use a gun ...

Or got cancer, buy a book on Self-Surgery and learn to use a scalpel ...

Need a road to drive somewhere? Buy and learn how to use a bulldozer ...

Snerd

This is likely the dominant enabler of bubbles: real asset price histories are kept well-out-of-sight. E.g.:
http://homepage.mac.com/ttsmyf/RD_RJShomes_PSav.html
including new last chart re. "Housing real past, & inferred outlook"
Please show real asset price histories to the people!

Let's not forget about Gentle Ben. In spring, '05 he said housing prices were driven by "fundamentals". Then, as FED Head in the Fall of '06 he issued the toothless non-traditional Mtg. guidance, that in effect warned his banks (& everyone else) they had a year b4 the game would end. For the 1st year BB was Fed Head he acted like his only tool was interest rates, forgetting that the FED DOES have authority over non-Fed bank mtg. policies. And, that's just for starters.

"Embarrassing" is a fair assessment of the role our "independent" FED has played in the housing debacle. It's especially embarrassing because Dean Baker laid-out the counter-argument clearly from the very beginning for ALL interested Economists (FED & otherwise) to see.

"many of the foreclosures that the country will see in the next couple of years."

gladstone:
> Always right around the corner, isnt it? Never this year, even though last year and the year before used to be "next year" way back when.
Could you clarify if housing prices have to fall for this to be considered a housing crash?

In case, you haven't noticed: foreclosures are way up, politicians scramble not to be seen as passive - what do you need more to aknowledge that the housing bubble is over and the bust is here?

It is apalling that in most states, mortgage brokers are unlicensed. They need licensing. It is interesting to note that for the Fed to squash the runup in housing prices was anathema to what they were supposed to be doing: measured advancement in overall growth. I still believe that Greenspan was overly concerned with upsetting the bond market with his gingerly 25 bp raises. Had he reduced the climb time by half, there would not have been the climate for ARMs that prevailed for too long. It seems like the bond market was the only indicater he was watching. You would think he would also have been keeping an eye on housing inventories. The other factor in the bubble was this glut of capital that kept gobbling up the mortgages through mortgage backed securities. Where did it come from? Was it the lard produced by the EGTRRA? It would be the second time that the primary benefiaries of Republican tax cuts would sink all their ill gotten gains into real estate (instead of into common stock).

If the year 2000 tax cuts had been centered on the lower income population, the federal funds rate would not have needed to be reduced to virtually zero in order to react to the slump. If the emphasis had been somewhat less on minimizing regulation and encouraging greed, the current liquidity crisis would have never happened. In fact, if we reversed many of the Bush administration policies, the country would be in better shape. As Churchill said, the US usually does the right thing after trying everything else.

"If the year 2000 tax cuts had been centered on the lower income population..."

Say what? The lower income population not only doesn't pay taxes, they get cash back that they never paid with the earned income tax credit.

How can you cut taxes on the group that pays no or hardly any tax?

"Between 2002 and 2004, tax payments by those with adjusted gross incomes (AGI) of more than $200,000 a year, which is roughly 3% of taxpayers, increased by 19.4% -- more than double the 9.3% increase for all other taxpayers." See the whole story at http://online.wsj.com/article/SB114670305012743294.html
and,
"The richest 1% of all Americans pay 33.7% of all federal income taxes, even after the Bush tax cuts, while the bottom 50% of earners pay a mere 3.6% share." See this at http://online.wsj.com/article/0,,SB111448254109016815,00.html

The fall of the dollar was inevitable. It is the only way to get the trade deficit down to size. The real problem was allowing the dollar to rise to the point that it made such a painful adjutsment necessary. This was the Clinton-Rubin high dollar policy. It felt good in the short-term (except for manufacturing workers), but just like tax cuts that lead to big budget deficits, it could not be sustained.