Money, Prices, And Bubbles‪.‬

Both monetary policy and real factors played crucial causal roles in the housing boom and bust. Monetary policy distorted relative prices, particularly intertemporal prices. Prices play a critical role in allocating resources by signaling the relative scarcity of resources. Prices convey information, but when distorted they may mislead. Nonprice factors also play important roles in guiding investors. These include accounting statements and credit ratings. Institutional change degraded the accuracy of these nonprice factors. Distorted prices, misleading accounting statements, and inflated credit ratings produced what I described elsewhere as an "economy of liars" (O'Driscoll 2010).