Greenspan gets defensive

Alan "Easy Money" Greenspan has been getting a lot of flack lately, and with cause. In today's Wall Street Journal, however, the venerable former Fed chief shoots back at those who believe his low interest rate policies helped inflate the real estate bubble.

Speaking his best Fed-speak, the Chairman assures us "[the] decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble." Huh?

What Mr. Greenspan meant to say is that he had nothing to do with the housing bubble. I think history will judge differently. The fact is, Mr. Greenspan repeatedly refused to acknowledge a housing bubble until it grew to dangerous proportions much like he failed to acknowledge the tech bubble until it collapsed. The Fed is chartered to protect price stability. While this is generally understood to mean consumer prices, it seems to me that protecting the markets from the emergence of speculative price bubbles is also well within the Fed's purview.

Once you get past Greenspan's self-justifying pretense, he makes a very good point. In the second to the last paragraph he speaks with atypical clarity. After explaining the need to avoid regulation that micromanages the financial industry, Greenspan says:

Any new regulations should improve the ability of financial institutions to effectively direct a nation's savings into the most productive capital investments. Much regulation fails that test, and is often costly and counterproductive. Adequate capital and collateral requirements can address the weaknesses that the crisis unearthed. Such requirements will not be overly intrusive, and thus will not interfere unduly in private-sector business decisions.

I couldn't agree more.