Should We Blame Greenspan?

Alan Greenspan, once regarded as a Maestro, and so admired that people actually believed a New Republic article by Stephen Glass and Jonathan Chait claiming that a Wall Street financial firm had a literal shrine to him, is now being blamed for the worst financial crisis since the Great Depression. Is that fair? Did Greenspan’s Fed create the dot-com boom, the dot-com bust, the housing boom, and/or the housing bust and the ensuing financial crisis?

Two weeks ago Cato published a paper by David Henderson and Jeffrey Hummel with the now-controversial and counterintuitive thesis that “although Greenspan’s policies weren’t perfect, his monetary policy was in fact tight, and his legacy is one of having overseen low and stable inflation and a striking dampening of the business cycle.”

This week Cato published a paper by Lawrence H. White with a very different perspective. White argues that after the dot-com bust, the Greenspan Fed held interest rates extremely low for several years, setting off what Cato senior fellow Steve Hanke called “the mother of all liquidity cycles and yet another massive demand bubble.”

Back in May, Gerald P. O’Driscoll Jr. had also sharply criticized the Greenspan Fed in a Cato Briefing Paper. He wrote that the Fed had been creating asset bubbles and moral hazard by its implicit policy of intervening to keep asset prices high.

More perspectives were heard this week at Cato’s Annual Monetary Conference. Video of the conference can be found here, and the papers will eventually be published in the Cato Journal.