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Greenspan's Monetary Policy
in Retrospect
Discretion or Rules?
by David R. Henderson and Jeffrey Rogers Hummel
No. 109
November 3, 2008
Executive Summary
In so doing, those critics make the classic mis-
Is Alan Greenspan to blame for the current
take of using interest rates to evaluate monetary
housing bubble and the ongoing financial crisis? A
policy, reasoning that if interest rates are low,
growing chorus charges the former Federal Reserve
recent monetary policy must have been expansion-
chairman with being an "inflationist" whose loose
ary. It is not the Federal Reserve but supply and
monetary policy caused or significantly con-
demand that ultimately determines interest rates.
tributed to our current economic troubles. How-
Although central banks can push rates up or down
ever, although Greenspan's policies weren't perfect,
to some degree, the globally integrated financial
his monetary policy was in fact tight, and his legacy
system reduces the Fed's ability to significantly
is one of having overseen low and stable inflation
influence rates.
and a striking dampening of the business cycle.
This paper should not be construed as a
Critics charge Greenspan with having carried
defense of all of Greenspan's policies, nor of cen-
on an excessively expansionary monetary policy,
tral banking or the Federal Reserve. In fact, our
particularly following the recession of 2001. They
preference would be to abolish the Fed and
note how low interest rates were from 2002
deregulate the banking industry. Barring that,
through 2004 and argue that those low rates
we argue that Federal Reserve policy ought to
paved the way for everything from high prices at
the pump to high prices at the supermarket, from
abide by the rules rather than the discretion of
the housing crisis to the financial crisis.
its chairman.
David R. Henderson, a research fellow with the Hoover Institution and an associate professor of economics at the Naval
Postgraduate School, is the editor of The Concise Encyclopedia of Economics. Jeffrey Rogers Hummel is an associate
professor of economics at San Jose State University and author of Emancipating Slaves, Enslaving Free Men: A History
of the American Civil War.
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