Federal Reserve chairman Ben Bernanke said the US central bank's low interest rates didn't cause the past decade's housing bubble and that better regulation would have been more effective in limiting the boom.
Increased use of variable-rate and interest-only mortgages, and the "associated decline of underwriting standards", were more responsible for the bubble, Mr Bernanke said yesterday.
Scholars such as Allan Meltzer, a historian of the central bank, have criticised the Fed for helping fuel the housing boom by keeping interest rates too low for too long. The bursting of the housing bubble led to the worst recession since the great depression and the loss of more than seven million US jobs.
"The best response to the housing bubble would have been regulatory, not monetary," Mr Bernanke said. The Fed's efforts to constrain the bubble were "too late or were insufficient", which means that regulatory actions "must be better and smarter", he said.
Mr Bernanke left the door open to using interest rates for preventing "dangerous build-ups of financial risks" should regulatory changes fail to be made or turn out to be insufficient.
He devoted most of the speech to rebutting criticism that the Fed's rate policy fuelled the housing bubble, and added that research showed the rise in house prices had little to do with monetary policy or the broader economy.
Under former chairman Alan Greenspan, the Fed lowered its benchmark interest rate to 1.75pc from 6.5pc in 2001 and cut the rate to 1pc in June 2003. The central bank left the rate at 1pc for a year before raising it at a "measured pace" of quarter-point increments from 2004 to 2006.
Mr Bernanke (56) joined the Fed as a governor in 2002 and supported all of the interest-rate decisions under Mr Greenspan before being appointed chairman in 2006. After the financial crisis struck, he cut the federal funds rate almost to zero in December 2008 from 5.25pc in September 2007.