Greenspan, Bernanke, and Bubbles
By Arnold Kling
Brad DeLong says I am wrong about his views of Greenspan.
I now think he was wrong not to move aggressively to curb the housing bubble of the 2000s. But I think all in all he did a very good job as a central banker over 18 years:
Let me remind Brad that when the Bush tax cuts were debated, Greenspan testified that they were necessary because with so much government surplus in the offing, the Fed would eventually run out of securities to buy to create money.
This was nonsense on many levels. It indicates the level to which a Fed Chairman must stoop in order to get along politically. Bernanke has also stooped, I believe, to get along with Paulson and, more recently, with the Democratic Congress (when Bernanke endorsed a stimulus proposal).
Megan McArdle questions whether Fed policy could have popped the housing bubble. I think that the housing bubble could have been popped easily by putting curbs on loans with low down payments. That could have been done in several ways. First, forbid Freddie and Fannie from doing anything to support low-down-payment mortgages. (Alternatively, rigidly require Freddie and Fannie to hold sufficient capital against the loans. That would have made them uneconomical to buy.) Second, adjust bank capital requirements to get rid of the loophole that allowed these high-risk loans to get low risk ratings when securitized. Third, just issue a warning against the practice.
Bernanke was a member of the Fed starting in 2002, and he could have advocated any of these policies. In my view, he shares with Greenspan any blame for not trying to pop the bubble.
I personally did not see the bubble until later than necessary to stop it. However, I was unaware of the lending practices taking place. I would have opposed the lending practices regardless.
In any case, one can argue that if the housing bubble had been popped, the excess risk-seeking funds would have gone elsewhere, creating a different bubble. I still think that the policy of encouraging high leverage in housing, a policy which continues to this day, was wrong.