According to Alan Greenspan, Alan Greenspan did not create the housing bubble and could not have prevented the economic calamity that followed the bubble's collapse.
These (perhaps unsurprising) revelations come in a paper Greenspan will present at a conference tomorrow.
In Giant Pool of Money fashion, Greenspan points to a rise in global savings in the first years of the 21st century as a key driver of the bubble.
But, contrary to what others have argued, he says that the low interest rates maintained by the Fed during those years were not an important factor. The Fed sets the rate for overnight loans between banks; the key rate for housing is for 30-year mortgages. And those 30-year rates were not linked to the Fed rate during the years when the housing bubble inflated, he argues.
"To my knowledge, that lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble," he writes.
What's more, he suggests, there's no good way for a central bank to prick a bubble while it's inflating without creating major economic problems.
At some rate, monetary policy can crush any bubble. If not 61/2%, try 20%, or 50% for that matter. Any bubble can be crushed, but the state of prosperity will be an inevitable victim. ... Unless there is a societal choice to abandon dynamic markets and leverage for
some form of central planning, I fear that preventing bubbles will in the end turn out to be
Greenspan does think that certain changes may help reduce the risks of similar crises in the future. But they're not rooted in monetary policy. Instead, he argues, banks and other financial institutions should be required to hold more capital and rely less on borrowing.
For more on what's in the paper, read coverage from the WSJ and the Economist.