One of the most persistent explanations for the 2008 financial crisis-especially among economists-is the notion that monetary policy in the early to mid-2000s was responsible for creating the immense housing price bubble that brought on the crisis when it collapsed in 2007. The argument is certainly plausible. Excessively low interest rates would encourage investment in real assets and aggressive reach for yield in a low-interest environment.  Under such a scenario, the acquisition of riskier assets like subprime mortgages could be a likely result.

There are certainly counter-arguments. Alan Greenspan, who is frequently blamed for those low short-term interest rates, points out that it is long-term rates that determine investments in long-term assets like housing, and they show a much closer correlation with housing prices in the 2000s than short-term rates. "[T]he fixed-rate mortgage clearly delinked from the federal funds rate in the early part of this century," he said in a 2010 Brookings Institution paper.

Still, the issue is clouded by the presence in the market at the time of the so-called 2-28 mortgages, which had a very low teaser rate for the first two years followed by a reset to a considerably higher long-term rate for the remaining 28 years. These instruments were meant to be refinanced before the reset and could have been heavily influenced by short-term rates. That possibility remains to be examined more closely.

However, most of the discussion of this issue goes on without anyone trying to determine when the bubble actually began, and thus its relation to the changes in interest rates over time. The chart below provides an interesting perspective on this question.

This chart, derived from Professor Robert Shiller's data, shows real housing prices in the U.S. since 1970. The vertical scale is the percentage of real housing prices over an earlier baseline. Two earlier bubbles are clearly visible around 1979 and 1989, but the chart is dominated by the massive 10 year bubble that began in 1997.

In order to get a better picture of the correlation between the great housing bubble and interest rates, however, we have to narrow the range of view. That is done in the chart below, which covers the shorter period from 1985 to 2007.

Now we can see that by 2000 the bubble was already larger than the largest previous bubble, and by 2003 it was three times the size of the largest previous bubble. The year 2003 is important because John B. Taylor of Stanford, father of the Taylor Rule in monetary policy, argues that the critical period-when interest rates were too low-occurred between 2003 and 2005. If we use that as our baseline, then the bubble was already enormous by the time the low rates kicked in.

Taylor, however, is not arguing that the excessively low interest rates between 2003 and 2005 caused the bubble, only that it accelerated the bubble's growth. This is entirely possible. I have not done the math, but it does appear from the chart that between 2000 and 2003 housing prices grew by 30 percent in real terms, while it grew another 30 percent between 2003 and late 2004.

The key question, however, is not what caused the bubble but whether low interest rates between 2003 and 2005 caused the decline in underwriting standards for residential mortgages-the "reaching for yield" idea. After all, it was the unprecedented number of mortgage delinquencies and defaults when the bubble deflated-a result of low mortgage underwriting standards in prior years-that caused the financial crisis by weakening financial institutions in the U.S. and around the world.

This question is easily addressed. By the mid-1990s, in order to comply with the affordable housing quotas imposed by HUD, Fannie Mae and Freddie Mac were already acquiring mortgages with downpayments of only three percent. By 2000, they were advertising for mortgages with no downpayment at all. Between 1997 and the end of 2002, they had already acquired more than $600 billion in subprime mortgages.

These low standards spread widely in the market, as private lenders followed the declining underwriting standards of Fannie and Freddie. By 2002, the year before the critical period identified by Taylor, the private sector securitized a total of $134 billion in these low quality assets (compared to $206 billion acquired by the Fannie and Freddie that year).

It appears, then, that while the low interest rates in the critical period between 2003 and 2005 could have accelerated the growth of the bubble, they could not have been responsible for the decline in underwriting standards that had begun almost ten years earlier.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute.  His book, "Bad History, Worse Policy: How a False Narrative About the Financial Crisis Gave Us Dodd-Frank" will be published in January.