Along with homebuilders and a once formidable investment banking firm, the fallout from the subprime housing crash has claimed another notable victim: Alan Greenspan's good name. It was not so long ago that "The Maestro," as he came to be called, was lionized as the greatest central banker ever. Now he finds himself enemy No. 1 in an increasingly anxious economic environment.
While the current crisis has generated plenty of blame to go around, it does seem that Greenspan is receiving more than his fair share. Critics argue that his drastic lowering of the fed funds target rate in the wake of the technology stock meltdown merely ushered in a larger, more destructive housing bubble, the bursting of which we're dealing with now. Greenspan is blamed for lowering borrowing costs too much for too long and thus manufacturing a speculative real estate nightmare.
Those blaming Greenspan should remember the limited mandate of monetary policy. The job of the fed governors is to balance the goal of full employment with the desire for price stability, not to regulate home prices. By all accounts, Greenspan's tenure was one of relatively low unemployment and low inflation that allowed for significant economic gains for a broad swath of Americans. It's not clear at all that an earlier tightening campaign by the fed would have materially reduced the irresponsible lending and borrowing that led to the housing bubble.
Greenspan's critics would do better to aim their derision at politicians responsible for this country's fiscal policy instead. Our federal government runs persistent deficits that require endless infusions of foreign investment to maintain, and the inability of politicians on either side of the aisle to address the looming Medicare and Social Security crises will result in much
larger problems down the road.
