Senior vice president and research director at the Atlanta Fed, David Altig, has a post up at Macroblog discussing the connection between monetary policy and housing bubbles. He is responding to John Taylor's comments at Jacksonhole where Taylor blames loose monetary for the housing bubble, citing a recent VAR study that found the deviation from the Taylor rule to be a large explanatory variable. Altig responds with points that deviations from the Taylor rule in the US are correlated with looser lending standards, and that this effect was not seen in Europe and in the UK, where the latter had a large increase in debt and housing prices similar to what happened in the United States.
My view of this debate is as follows:
1. You can prove many preconceived notions by carefully selecting your data set, or citing people who do. This applies to both sides.
2. The United Kingdom should be analyzed more like a large offshore financial center, so its own monetary policy's deviation from a Taylor rule would obviously be less important than exogenous variables.
3. Loose monetary policy might be behind looser lending standards. The banks that aren't relaxing their lending standards their lending standards when monetary policy is loose are likely to lose business. This argument is similar to the typical Austrian Economist's response to the rational expectations arguments against the Austrian Business Cycle Theory. Businesses that don't want to participate in the boom because it is unsustainable have to participate in some form because it is the only game in town.
4. Monetary policy was too loose and helped speed along a crisis, but the properties of the finance industry make bubbles and their subsequent crashes inevitable.