johnnymk

http://www.usnews.com/blogs/capital-...ng-bubble.html

Two European Central Bank economists, in a paper presented at a conference run by the St. Louis Federal Reserve Bank, say the housing boom—and slightly higher inflation—were caused by the Alan Greenspan-led Fed's holding interest rates too low for too long earlier this decade. "Easy monetary policy designed to stave off perceived risks of deflation in 2002 to 2004 has contributed to the boom in the housing market in 2004 and 2005,'' economists Marek Jarocinski and Frank Smets said in the academic paper.

Ultimately, I don't think this is much of an indictment. Their calculations show inflation was only one quarter of a percentage point higher than it would have been without the Fed rate cuts. That seems like a small price to pay for avoiding a deflationary spiral and gaining a housing boom that dramatically increased the net worth of many Americans, who are still sitting on huge gains even with the bubble now deflating. And even after all the subprime defaults and foreclosures, homeownership is still likely to be higher than it otherwise would have been.

Indeed, Greenspan might want to fully embrace and tout his role in all this. Just as the Internet bubble left behind Google, eBay, and 90 million miles of fiber-optic cable, the credit bubble upgraded America's aging housing infrastructure and created a host of online services—Realtor.com, Zillow—that have permanently shifted the balance of power from real-estate agents to consumers. (This whole argument is wonderfully argued in the book Pop! by Daniel Gross.) And as Australian economist and bubble-ologist Jason Potts puts it, "A bubble is good for growth because it creates a low-cost environment for experimentation." Even if it eventually pops.

Maarchk

He contributed, but there were much bigger things. The easy going lending like 40 year loans and ARM and sub-prime are the catalysts. he was just perhaps an ignition. I don't think he was wrong in what he did. I blame shady loan brokers and people who couldn't imagine the bubble one day ending.

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zippyjuan

For several years, the housing boom was one of the few things keeping the economy going. The Fed has limited tools to effect the economy and under Greenspan they chose to focus on inflation. If you can keep inflation under control, you can lower the costs of doing business since you have a better idea of what your production costs are going to be as well as what you can probably sell your product for. Real interest rates can be lower (real interest rates comprised of the nominal rate the lender expects to receive plus the rate of inflation) and these factors lead to more investment in equipment and business expansion. High inflation means more uncertainty and more risk to someone looking to invest more into their company. If the Fed takes care of inflation as best they can, the rest of the economy can run better. They cannot and do not try to control all factors like housing.

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