Two years ago, top economists here at the Federal Reserve's annual conference praised Alan Greenspan as possibly the greatest central banker ever. This year, several suggested his Fed helped spur the current meltdown in credit and mortgage markets by cutting interest rates too much and regulating too little.
Analysts were divided, however, on whether the turmoil, and downward spiral in the housing market, would push the United States into recession.
Fed Chairman Ben Bernanke said in a speech Friday that it is not the central bank's job to bail out individual investors, but that it would do what is needed to limit broader economic harm from the recent seize-up of credit markets and the potential for a deeper housing fall.
Harvard economist Martin Feldstein said housing woes pose a triple threat to the economy with a collapse in construction, slower spending by consumers less able to tap home equity and tougher lending standards.
He suggested the Fed might have to cut a key interest rate as much as a percentage point from the current 5.25%.
That could support employment, help borrowers with adjustable-rate loans and shore up other markets. On the downside, it could fuel inflation and aid people who made bad business decisions.
"It would be a mistake to permit a serious economic downturn just to avoid helping those (market) participants," Feldstein said.
UCLA economist Edward Leamer argued the Fed should pay more attention to real estate, saying a housing downturn foreshadowed almost every recent U.S. recession. Still, he added, recession is not inevitable, in part because manufacturing is not likely to lose as many jobs as in past downturns.
Leamer said the Fed may have laid the groundwork for the housing bust and credit market turmoil by cutting interest rates too low earlier in the decade.
It's "best to remember that the teaser rates for (adjustable-rate) mortgages came from Washington, D.C., not from Wall Street," Leamer said.
Stanford economist John Taylor also suggested that the Fed sharpened the housing boom and bust by keeping interest rates too low from 2003 to 2006.
He noted the Fed was acting in a complex financial environment and that long-term rates did not rise as much as expected when it did tighten.
Fed Governor Frederic Mishkin argued that the central bank should not give housing an elevated role in policy or try to pop asset bubbles. Still, Mishkin said, the Fed should be prepared to act quickly to ensure falling housing prices don't seriously damage the broad economy.