Lehman (LEH) is NEXT

And home prices continued to rise rather sharply, even as the Fed began to raise rates in 2005-6. We built 3.5 million more homes over the last ten years than the trend growth suggested we needed. They were not all built during the period of low interest rates.

While low rates did help, the bubble was aided and abetted by sloppy lending practices. It now looks like some two million people took out loans they are going to have difficulty repaying, and are likely headed for foreclosure. Rating agencies labeled these loans as AAA credits. Mortgage and investment bankers sold them to all manner of institutions.

All these culprits took advantage of the low rates, but that was not the cause of the bubble. If proper lending practices had been followed, there would have been far fewer buyers and less building, less speculation, and so on.

Greenspan, in hindsight, should have raised rates soone. And lower rates did make homes more affordable. No question about that. But to lay the blame for the housing bubble at his feet is not entirely fair. He had a lot of helpers who did the really heavy lifting.

Speaking in Boca Raton, Fla., in March 1999, Alan Greenspan, then the Fed chairman, told the Futures Industry Association, a Wall Street trade group, that “these instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it.”

Although Mr. Greenspan acknowledged that the “possibility of increased systemic risk does appear to be an issue that requires fuller understanding,” he argued that new regulations “would be a major mistake.”

“Regulatory risk measurement schemes,” he added, “are simpler and much less accurate than banks’ risk measurement models.”

Mr. Greenberger, still concerned about regulatory battles he lost a decade ago, says that Mr. Greenspan “felt derivatives would spread the risk in the economy.”

“In reality,” Mr. Greenberger added, “it spread a virus through the economy because these products are so opaque and hard to value.” A representative for Mr. Greenspan said he was preparing to travel and could not comment.