Free Exchange agrees with Ben Bernanke (and me that stopping the housing bubble was more of regulatory issue than a monetary policy issue.

the Fed didn’t act because there is something institutionally the matter with it, which prevented effective regulatory action. Perhaps the Fed is too independent, and can be directed by its chairman to ignore clear warning signs. Or perhaps it isn’t independent enough, and is led by Congress or Wall Street to keep the party going, despite the risks. Maybe there are intellectual gaps or communication problems.

I added the emphasis, because I think that was the problem. Go back to 2003, 2004, 2005, and 2006, and ask yourself “What would Barney do?”

Was Barney Frank ever willing to contemplate tighter credit in housing? Even today, what Congress wants are mortgage modification programs and subsidies for home purchase.

Real Time Economics writes,

Karen Pence, who runs the Federal Reserve’s household and real estate finance research group, argues at the American Economic Association’s meetings this week that homes are actually a terrible investment.

Read the whole thing, which lists the reasons.

Suppose that we got rid of every government policy that promotes home ownership, from the mortgage interest deduction to government school districts. What alternative housing contracts might emerge? I can think of two.

1. Rental agreements with termination bonuses/penalties. As a renter, I get a bonus if I stay for a long time (saving the owner the cost of finding a new tenant) and/or I leave the property in improved condition. If I do the opposite, then I pay a penalty.

2. Franchises with furnished apartments that would allow one to pay rent to a single franchise but live in two or three cities over the course of a year. Different franchises would specialize in different clusters of amenities. One franchise might always offer a large, well-appointed kitchen. Another franchise might always offer a minimal kitchen.

The only people who should own homes are people who are inclined to make expensive, idiosyncratic investments in amenities. If I want to grow exotic plants or maintain large model railroads, then I need my own house. If my hobbies are less unusual or impose fewer requirements on how the property is shaped, then I can find rental units that will be accomodating.