South By North Strategies, Ltd.

At Economist’s View, Mark Thoma asks if low interest rates or regulatory failures caused the housing bubble. His answer: both.

What fueled the housing bubble? There were three main sources of the liquidity that inflated the bubble. First, the Fed’s (and other central banks’) low interest policy added cash to the financial system, second, the high savings in Asia, particularly China, along with cash accumulations within oil producing nations, and third, some of the cash was generated endogenously within the system (e.g. by increasing leverage or by diverting other investments into housing and mortgage markets).
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Once the fuel was present, something had to allow the bubble to inflate and then do widespread damage, and that’s where the regulatory failure comes in. But I don’t think the regulatory failure matters much without a large amount of liquidity within the system, and I don’t think the large amount of cash in the system is problematic without the regulatory failures.