WASHINGTON (MarketWatch) - The Federal Reserve had a role in inflating the housing bubble, but it wasn't low interest rates in the U.S. that fueled speculation in housing around the globe, Fed Chairman Ben Bernanke said Sunday.

Rather, it was lax supervision of toxic mortgages by the Fed and other bank regulators -- along with excessive flows of capital around the globe -- that inflated the bubble, setting up the world economy for what may have been the worst economic crisis in modern history, Bernanke said. Read full text of his speech.

In twin speeches at the annual meeting of the American Economic Association in Atlanta, Ga., Bernanke and his vice chairman, Donald Kohn, responded to critics who suggest that the Fed's policy of very low interest rates from 2001 to 2005 was the major cause of the housing bubble.

"The magnitude of house-price gains seems too large to be readily explainable by the stance of monetary policy alone," Bernanke concluded in his speech. Comparisons with other major economies shows that countries with relatively higher interest rates had larger housing bubbles, he said.

Bernanke conducted a kind of post-mortem on the housing bubble. Using historic relationships, he concluded that low interest rates were responsible for about 5% of the change in housing prices, while greater global capital flows explained about 30% of the change.

The biggest cause of the bubble was exotic mortgages and the decline in underwriting standards, he said. Buyers were able to lower their initial monthly payments, which allowed prices to soar to unsustainable levels.

"Both lenders and borrowers became convinced that house prices would only go up," Bernanke said. "Borrowers chose, and were extended, mortgages that they could not be expected to service in the longer term. They were provided these loans on the expectation that accumulating home equity would soon allow refinancing into more sustainable mortgages. For a time, rising house prices became a self-fulfilling prophecy, but ultimately, further appreciation could not be sustained and house prices collapsed."

"That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary," Bernanke said. "Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates."

Bernanke said the Fed and other regulators finally adopted rules to stop the worst practices, but "these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble."

Raising interest rates to stop the bubble would have required the Fed to make a judgment about the sustainability of housing prices, something the central bank has been reluctant to do.

Even if the Fed had decided the bubble should have been deflated earlier, raising rates in 2003 or 2004 "could have seriously weakened the economy at just the time when the recovery from the previous recession was becoming established," Bernanke said.

In his speech, Kohn said raising interest rates now to prevent commodity price bubbles from developing would be ineffective and likely would damage the fragile economic recovery. Read the full text of Kohn's speech.

Kohn said the economy is likely to grow more slowly than its potential for some time, while inflation is likely to be below the Fed's target of 2%.

In this context, "tightening policy to head off a perceived threat of asset price misalignment could be expensive in terms of medium-term economic stability."

"We do not have good theories or empirical evidence to guide policymakers in their efforts to use short-term interest rates to limit financial speculation," Kohn said.