The Everyday Economist

John Taylor looks at housing and monetary policy:

Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counterfactual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation.

Here is a non-gated version of the paper.

A graph of house prices-to-rental ratio from Barry Ritholtz.

In a related housing note, Paul Krugman laments about Greenspan:

I once described Alan Greenspan as being

like a man who suggests leaving the barn door ajar, and then - after the horse is gone - delivers a lecture on the importance of keeping your animals properly locked up.

I was talking about Greenspan’s support for the Bush tax cuts, followed by his lectures on fiscal responsibility.

But it also applies to what he’s saying now about the subprime crisis.

Indeed. (It is amazing how much I enjoy Krugman the blogger and Slate columnist and how much I disdain Krugman’s NYT columns.)