check out this NYT piece blaming the housing/credit problem on free markets. http://www.nytimes.com/2007/12/30/weekinreview/30goodman.html This author's position completely overlooks the popular argument that years of centrally planned, artificially low interest rates played a major role in creating the housing bubble. As long as we have a fed attempting to assert synthetic market forces, there is no invisible hand to speak of... let alone an invisible hand to blame.
What's missing here is both a global and a historical perspective. As long as China and the rest of the Asian CB's buy up dollar-denominated assets, the Fed will have to keep rates lower than would be necessary, in times of recession, to keep the economy spiraling into a depression like the Thirties. It's kind of like friction: since some of the dollars the Fed throws out to keep things from getting out of control over here go into stimulating demand in China, they have to keep throwing them out until they get the job done. This is not unusual: it's a known cost of having the world's reserve currency. The only way to solve it is to get a global consensus around a non-government mode of valuing currencies. Given the current global cultural consensus around governments being the stabilizer of last resort for the world's various economies, this cost will continue to be borne, either by the US or by whomever replaces the US as holder of the world's reserve currency. This of course encourages speculation in the economy of the reserve currency holder, not to mention war. Both are effects of the surplus of money available, in the case of speculation to the private economy, in the case of war to the public economy, i.e., politicians, who are as ruthless in the pursuit of power as the private person is in pursuit of wealth. Generally speaking, asset inflation is the result in the private economy, and usually this winds up settling in real estate, because this is usually the largest asset class. Once again, not unusual. BTW, the global consensus around governments being the stabilizer of last resort is not exactly surprising, given that most people around the world have, quite literally, no assets, and therefore no stake in the global economy. This is the default state of the world, and has been since civilization first started, 10,000 years ago. We were given one chance, from 1875 to 1918, to change this. The attempt failed, as the most advanced nations gave in to the temptation to go to war rather than continue down the road to continuing stability and eventual global prosperity, first, and then, second, finished it off for good by making a vengeful peace, instead of settling for an unsatisfying compromise, as they did after defeating Napoleon 100 years earlier. Chalk it up to human nature.