Following up on a point I made in Atlanta (along with many others), David Leonhardt takes Ben Bernanke to task for failing to concede that the Fed, himself included, missed the bubble.

But it’s actually a bit worse than that: Bernanke’s presentation suggests that the Fed is still using some of the flawed methodology that helped it miss the bubble.

Way back when, here’s what I wrote:

Many bubble deniers point to average prices for the country as a whole, which look worrisome but not totally crazy. When it comes to housing, however, the United States is really two countries, Flatland and the Zoned Zone. In Flatland, which occupies the middle of the country, it’s easy to build houses. When the demand for houses rises, Flatland metropolitan areas, which don’t really have traditional downtowns, just sprawl some more. As a result, housing prices are basically determined by the cost of construction. In Flatland, a housing bubble can’t even get started. But in the Zoned Zone, which lies along the coasts, a combination of high population density and land-use restrictions – hence “zoned” – makes it hard to build new houses. So when people become willing to spend more on houses, say because of a fall in mortgage rates, some houses get built, but the prices of existing houses also go up. And if people think that prices will continue to rise, they become willing to spend even more, driving prices still higher, and so on. In other words, the Zoned Zone is prone to housing bubbles. And Zoned Zone housing prices, which have risen much faster than the national average, clearly point to a bubble.

When I wrote that I was thinking in particular of studies at the Fed that tried to rationalize aggregate national prices, but clearly had no explanation of the much bigger price increases in coastal areas.

Here’s the story of two metro areas, Los Angeles (which has run out of room to sprawl) and Atlanta, the ultimate Sprawl City:

Case-Shiller, BLS

Huge bubble in LA; nothing in Atlanta. Looking at the national data was deeply misleading.

So here’s one of the charts from Bernanke’s paper at the meetings:

Federal Reserve Board of Governors

Yep, he’s using average US housing prices as a bubble indicator. This wouldn’t matter if the division between Flatland and the Zoned Zone was comparable across the advanced world, but it isn’t: other advanced countries lack sprawling metros comparable to Atlanta or Houston. So we aren’t learning much from this comparison.

And the whole thing suggests that the Fed hasn’t learned much about how to identify housing bubbles.