"There's no question that the Fed should have much earlier raised interest rates, not to kill the housing sector, but to keep it sustainable," Leamer says.
He adds that today's housing market is different from the dot-com stock mania of the late 1990s, in that soaring Internet stock prices could at least be justified by the perception that technology was changing the world, creating a "new economy." Greenspan was blamed for helping fuel the stock bubble with statements in the late 1990s touting the "new economy."
But "houses are exactly the same now as two years ago. There is no 'new economy' when it comes to homes," Leamer says. Thus, cooling off housing should have been "an easy call to make."
The Fed began raising its benchmark short-term interest rate in June 2004, and has done so 10 times since, in increments of a quarter percentage point each, to the current level of 3.5%.
The Fed's ideal, economists say, is to engineer a "soft landing" similar to the one in 1994-95. Then, Fed rate hikes cooled off the economy without triggering a recession. The 1990s boom was the longest economic expansion in the postwar period, often cited as one of Greenspan's crowning achievements.
But soft landings aren't easy. It's difficult to deflate a bubble without causing a crash.
Another complication for the Fed chairman: high energy prices. With consumers suffering at the gasoline pump and businesses facing bigger energy bills, raising rates too aggressively could trigger an economic slowdown. All postwar recessions, except the one in 1960, were preceded by energy price surges.
"Today's extraordinarily low real borrowing costs just might spare the U.S. economy from another energy-related slump," says John Lonski, chief economist at Moody's Investors Service in New York.
Another problem that Greenspan faces in managing a possible bubble: The Fed doesn't control long-term interest rates, which help determine the level of long-term mortgages. Long-term interest rates, such as the yield on 10-year Treasury notes, are influenced by bond market investors, including foreign central banks, pension funds and speculators. They have kept long-term rates relatively low, defying repeated Fed hikes in short-term rates.
"The Fed has been singularly unsuccessful in cooling down the hot U.S. housing market, primarily because its rate hikes have had little impact on long-term interest rates -- so far," says Nariman Behravesh, chief global economist at Global Insight, an economic consulting firm in Waltham, Mass.
