You can almost hear the collective sigh of relief emanating from the Federal Reserve Board in Washington, and the nearby offices of Alan Greenspan, at Fed chief Ben Bernanke's elegant, econometric argument that low interest rates didn't cause the housing bubble.

The Fed, in other words, is guilty of one count of regulatory failure. As to the charge of using interest-rate policy to inflate the housing bubble that burst and destabilised the entire financial system, the defendant is not guilty.

In a speech to the annual meeting of the American Economic Association (AEA) in Atlanta last weekend, Bernanke said the links between monetary policy and home prices were weak. His conclusions, based on econometric models and statistical analysis, may resonate with his AEA audience. For the rest of us, they leave something to be desired.

For example, Bernanke takes great pains to rebut criticism that the funds rate was well below where the Taylor Rule, developed by Stanford economist John Taylor, suggested it should be following the 2001 recession. The Taylor Rule uses actual inflation versus target inflation and actual gross domestic product versus potential GDP to determine the appropriate level of the funds rate.

Substitute forecast inflation for actual inflation, and the personal consumption expenditures price index for the consumer price index, and – voila! – monetary policy looks far less accommodating, Bernanke said.

It's always easier to start with a desired conclusion and retrofit a model or equation to prove it.

Moving right along, more than half of the countries with tighter monetary policy than the US witnessed greater house price appreciation. For Bernanke, this proves that "the relationship between the stance of monetary policy and house price appreciation across countries is quite weak".

What if easy money is a necessary but not sufficient condition to explain the magnitude of housing bubbles across countries?

Unlike his predecessor, who argued that low short-term interest rates could not have caused the bubble because housing is a long-lived asset, Bernanke acknowledged the effect on variable-rate mortgages. As a share of total mortgage volume, variable-rate mortgages rose from about 15% in mid-2003 to more than 35% in 2004 and early 2005.

It wasn't the rates on these mortgages that exacerbated the bubble, Bernanke argued. It was the exotic nature of instruments such as pick-a-pay and negative amortisation mortgages, along with lax underwriting standards. These were regulatory, not interest rate, failures.

I know Bernanke has given this issue a great deal of thought and devoted the Fed's resources to finding the correct answer. Still, the defence sounds like something out of an ivory tower, divorced from reality.

The real fed funds rate was negative from 2002 to 2005, the longest stretch since the 1970s, a decade notable for high inflation and unemployment. The teaser rates lenders offered on variable-rate mortgages were pretty close to zero when adjusted for inflation.

When you can borrow for free and invest in an asset whose price can only go up (at least that was the perception about home prices), guess what happens? Credit is misallocated. Lending standards decline. Everyone wants in.

Yes, monetary policy is a blunt instrument, as Bernanke pointed out. Keep rates too low – create too much money – and sometimes that money chases goods and services prices, which we designate as inflation. Other times it piles into certain assets, which we call a bubble.

By rights the Fed should be indifferent as to which of the two outcomes its interest-rate policies engender. Neither is good for the economy.

"The best response to the housing bubble would have been regulatory, not monetary," Bernanke said, avoiding any reference to prevention.

The two aren't substitutes. Relying on regulation to counteract the impetus of easy money is like using a split-rail fence to stop an auto with the accelerator pressed to the floor. They are different species, operating in different spheres.

All the regulation in the world can't counteract the power of near-zero interest rates. At the same time, high interest rates won't prevent financial institutions from engaging in shady practices. To think regulation can prevent the next asset bubble is naive.

Why is the Fed so fixated on inflation expectations and so blasé about asset-price expectations? Aren't they of a piece?

Bernanke didn't shut the door on using interest rates to prevent an asset bubble. In the very last paragraph of his speech (conveying relative importance through placement?), he said rates would be a "supplementary tool" absent adequate regulatory reforms.

They may be supplementary for Bernanke. For the rest of us, whether we spend, save or invest, they're primary.

Caroline Baum, author of 'Just What I Said', is a Bloomberg News columnist