Two Cheers for Greenspan and the Housing Bubble

A new study says former Fed chief deserves the blame—or credit—for the real-estate boom.

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Two European Central Bank economists, in a paper presented at a conference run by the St. Louis Federal Reserve Bank, say the housing boom—and slightly higher inflation—were caused by the Alan Greenspan-led Fed's holding interest rates too low for too long earlier this decade. "Easy monetary policy designed to stave off perceived risks of deflation in 2002 to 2004 has contributed to the boom in the housing market in 2004 and 2005, economists Marek Jarocinski and Frank Smets said in the academic paper.

Ultimately, I don't think this is much of an indictment. Their calculations show inflation was only one quarter of a percentage point higher than it would have been without the Fed rate cuts. That seems like a small price to pay for avoiding a deflationary spiral and gaining a housing boom that dramatically increased the net worth of many Americans, who are still sitting on huge gains even with the bubble now deflating. And even after all the subprime defaults and foreclosures, homeownership is still likely to be higher than it otherwise would have been.

Indeed, Greenspan might want to fully embrace and tout his role in all this. Just as the Internet bubble left behind Google, eBay, and 90 million miles of fiber-optic cable, the credit bubble upgraded America's aging housing infrastructure and created a host of online services—Realtor.com, Zillow—that have permanently shifted the balance of power from real-estate agents to consumers. (This whole argument is wonderfully argued in the book Pop! by Daniel Gross.) And as Australian economist and bubble-ologist Jason Potts puts it, "A bubble is good for growth because it creates a low-cost environment for experimentation." Even if it eventually pops.