The cause of bubble and Fed's responsibility

There are many reasons for the finacial bubbles we experienced in history. On the surface, they always involved greed and lax government regulations. But deep down, they were caused mostly by the mis-pricing of risks. When price of the risk is low, people will borrow to speculate, whether it is stock market, real estate or art. It creates bubbles. When risk is priced too high, then, economic activities slows down and recession would occur. Most of the time, the problem is the risk being priced too low.

Economists always look at credit spread to judge the price of risk. I think you have to look the level of the rates as well. A spread of 3% is different when the base is 1% or 5%. 4% interest rate will not discourage speculation while 8% may. Federal reserve does not admit it played a role in creating the housing bubble because they did not see much changes in the spread. However, the absolute level of interest rate was very low that speculations are everywhere. I truly believe, the current zero interest rate will create risk mispricing again.