Greenspan could have done much more, even while keeping interest rates low to stave off deflation. CalculatedRisk says his greatest error was lax oversight and regulation of lending. He could have increased margin and reserve requirements. He could have railed against the SEC decision that let the top 5 investment banks to have unlimited leverage. With an army of economists behind him, he had to know there was a huge bubble. Of course, as Dean says, just making other people aware of the problem could have had a profound effect. Hardly anyone was more respected than he was. But he was playing the infamous political game just like everyone else: after me the deluge. And of course, his brain was yoked to Milton Friedman's market fundamentalism, the market will fix your problems, except when it came to bailing out his banking friends, which was needed so many times he should have questioned the whole theory.

Some have also claimed Bush was holding a gun to Greenspan's head, but I really wonder about that. Nevertheless, the biggest buck always has to stop at the very top. If the one there doesn't have an inquiring mind, or listen to those who do, we're toast.

Planning to see the movie "W" this weekend.

I really wish this website had a post to Facebook option. I'd love to throw this up on my page.

THE real injustice is that Ben Bernanke repeated Greenspan's mantra that housing prices were driven by fundamentals, as recently as Spring, 2006 - after the bubble popped!

Can anyone identify one preemptive act BB's taken, aside from throwing money from helicopters, to short-circuit the mess we face?

The overarching question to be asked of the Bushies (including Paulson), BB, and our "leading" Congressmen is, why do they hate their kids & grandkids so much?

I doubt that the man or woman that failed to keep paper towels or tissue in the restroom for 6 or 12 months would keep their job, but in the financial world the lack of responsible behavior is acceptable and even richly rewarded.

Where is the press when we need them?

Greenspan is a Randian who was selected by the Reagan administration. I don't know whether Bernanke subscribes to any crackpot ideology, but he was selected by the Bush administration, the members of which do have crackpot ideologies of various kinds.

I agree 100% with Dean that if the government (including the Fed) takes responsibility for controlling the downside they must also control the upside, but I think that mechanisms for doing this must be largely automatic, not reliant on the predictably fallible judgement of a few individuals. The New Deal tried to do this, but their legislation has been dismantled.

Dean,

I enjoy your writing and this is the best of many outstanding blog entries.

Dean: I totally agree with your post, but I'd be interested if you or anyone else could point me to a single economist representing that viewpoint in '02, '03 or '04. I have long argued that the proximate cause of this entire mess is Alan Greenspan, because he (1) set the Fed Funds rate too low for too long, and (2)fought against the regulatory oversight all now seem to agree was absent. However, and I ask again... please point me to any serious economist or political commentator who went on record to that effect then. Complaining now is very different from identifying the problem and proposing a solution then.

From the various economic research papers I have read, it seems that Greenspan was of the mind that nothing could be done about bubbles.

1) they are difficult to perceive before they are large

2) their responsiveness to monetary policy is still unknown.

That's my guess what he was thinking/. In general, their doesn't seem to be a concensus view of how to respond to asset bubbles with respect to the Fed.

That being said, there was nothing wrong with Dean said he could have done. Then again, if he wasn't going to anything about it, then maybe he felt it wasn't his role to comment....but he did comment when he talked about 'froth.' He certainly could have corrected himself.

I may be wrong but I don't think that the problem is "Who could have known?".

I think that the problem is "We all knew (in our guts) that this easy credit binge could (would) be a problem someday but we kept allowing it to happen because it felt good and our neighbors (competitors) were buying things so why shouldn't we? I can't really fire people who were doing what I wanted and what I, myself, was doing."

Just my two cents.

So maybe Krugman ought to leverage his Nobel into a Fed chairmanship.

Fed doesn't have a history of giving out strong warnings about upcoming or developing storms including asset bubbles.

Is that part of the Fed's mission? I am not sure.

Of course, if you want to go to the extreme, you could use the system risk provision.

James,

Greenspan interpreted the Fed's mission as requiring that it intervene in the unwinding of Long-term Capital. He doesn't even have the fig leaf of an excuse on the definition of the Fed's mission.

C'mon. This isn't fair. These guys (and they were mostly guys) had other things on their minds--all those houses to be updated, renovated and expanded, the vacation planning to be supervised, helping their kids apply for preschool, furnishing the jet etc. There just wasn't time.

Market bubbles are not hard to see. Charting over 20 years and longer, exponential growth curves are really quite visible. And sharp declines from bubbles when they've gone nearly vertical are completely predictable. The only thing uncertain is the moment that fall will begin.

As a result, those predicting such collapses are dismissed as people crying wolf because they describe the wolf coming earlier than they actually reach our doors.

So the real problem isn't that nobody knew. It's that they refused to accept the inevitable and certain, thinking the wolf would arrive on somebody else's watch.

More simply, they gambled and lost. But they knew quite well they were gambling. And they've agreed to exonerate their fellow gamblers if they get provided the same courtesy from their equally guilty peers.

It brings to mind the old Teddy Roosevelt quote: "A man who has never gone to school may steal from a freight car; but if he has a university education, he may steal the whole railroad."

These learned business executives have ridden that train. And if they lacked the foresight and hindsight to know what was coming, they may not be overt thieves, but they are - at the least - grossly ignorant. There should be a punishment for that, as there is within any other profession.

And there should be honors given to those who predicted the collapse. Otherwise, the rewards provide incentives to steal, to make high-risk gambles and to be demonstrably stupid.

Dean:
I'll ask a very simple question again:

I'd be interested if you or anyone else could point me to a single reputable economist representing that viewpoint in '02, '03 or '04.

Complaining now is very different from identifying the problem and proposing a solution then. I've long held the view that our boy in the bubble is at fault for many reasons, but I can't find a single source that said that in the time frame in question. Indeed, Krugman (for example) said (and continues to say) that he supported and supports the low FF rate set by the fed... which is clearly the match that lit the fire. Or to put it another way, could we have had a housing bubble with a 6% FF rate...

So please, Dean or anyone else post a link to a responsible economists who pointed this out at the time.
thanks

Sid - although not an economist, check out Jeremy Grantham of GMO - he has his quarterly client letters up on the co. website. He has been calling things correctly for the past 15 + years. He is considered a sage similar to Buffet.
Dean - why didn't you start a hedge fund (ie. Paulson & Co.) and you could have made a fortune amongst this debacle and then given it all away.

I agree with Dean that there should be much more proactive policy to try to contain bubbles before they get too large. However, it is not always so easy to see what to do, and Dean recognizes that raising interest rates may be too blunt of an instrument. It is also the case that different tools may be necessary for different bubbles, thus stopping an oil bubble might take selling some oil from the Strategic Petroleum Reserve.

I think there were two other matters on Greenspan's mind, besides his general market fundamentalism, and perhaps a desire to help W get reelected in 2004 after he was blamed by W's dad for his failure to get reelected in 1992.

One is that he did mention a possible bubble in the stock market back in 1996, his famous remark about "irrational exuberance" in the stock market that he reportedly picked up from Robert Shiller. Only problem was/is that the market has never gotten back down to the level it was back then. So, this certainly helped to make him somewhat gun shy.

Also, there is this bad institutional memory that the tight monetary policy in 1929 was partly driven by a desire precisely to prick the stock market bubble. That "succeeded," ugh.

Regarding Bernanke, he pulled off an amazing balancing act during his year as Bush's CEA Chair, avoiding annoying Bush while at the same time managing to avoid saying anything patently silly in public as some other CEA Chairs did, such as Greg Mankiw. Al Gore has said that the appointment of Bernanke has been the only decision/act of Bush's he agrees with, and I would say that Bernanke was clearly superior to alternatives, such as Hubbard or Feldstein.

Howver, I agree with Dean that he should not have made the comments he did in 2006 about the housing market. I do not know if he was simply misinformed/wrong, or trying to do the "happy talk" routine that Fed Chairmen often engage in to try to stabilize the markets. In any case, he probably should have just remained silent.

Ummm. Who exactly would take their place if they were fired? Their sycophantic underlings who were just as stupidly complicit? Or do you suggest going to Hank Paulson for some recommendations? How about GWB? I'd suggest Mae West because she understands these things; "I was Snow White but I drifted."

You suggestion that people should be fired is resonant but I'd surely like to hear about who would pick the replacements.

John Talbott in his remarkable book "the Coming Crash in the Housing Market" has an excellent point about preventing bubbles. When the bubble was mid-way on the up side, Fannie Mae raised the ceiling on the size of the mortgage it was willing to finance. Since larger mortgages were obtainable, people bid up the price of houses still further. It was a feed back loop, like holding the microphone too close to an audio speaker. If Fannie had stuck to its long term ceiling, people would not have had additional (borrowed) money with which to chase more expensive houses. The price of houses would have topped out way earlier than they did.

Simple, effective and no cost to the taxpayer.

Dean:
Third times the charm, so I'll ask a very simple question again:

I'd be interested if you or anyone else could point me to a single reputable economist representing that viewpoint in '02, '03 or '04.

Your silence on this question raises questions about the validity and fairness of 'rear-view mirror' critiques.
thanks
Sid

Suppose that in 2002 . . . Alan Greenspan tells Congress that he is very worried about the unprecedented run-up in house prices. Dean Baker

In 2002 real house prices were a bit above 1989 prices, but mortgage interest rates were substantially lower (6.54% v. 10.32%).

What's "unprecedented"?

I am a casual reader of CPR over the last six years and I remember clearly that Dean was already warning us about the housing bubble at that time.

Luciano: There is no question that Dean was among the first, if not the first, to argue convincingly about the presence of a housing bubble (2002). My question, however, goes to cause. It's not clear to me what he thinks the cause of this bubble was, and it's certainly not addressed in his early and very prescient papers on the subject. I've recently had some very lively discussions with friends about this subject (with my opinion as I stated it above) and was simply looking for a more professional view. thanks for your comment.

This reeks of the application of the hypocrisy of the conservative notion of "Neoliberalism for you but the Nanny State for me (the elite)" in the microcosism. That is, the free market applies to the average or poor stupid classes but since I am at the top of the hierarchy I can apply "l'etat c'est moi" without accountability.

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