Former Fed Chairman Alan Greenspan defended his "easy money" policies today in the Wall Street Journal, saying they did not cause the housing bubble. He placed the blame on the extreme growth in China and other emerging markets, which led to an excess of savings that pushed global long-term interest rates down between 2000 and 2005. Before this phenomenon, Greenspan argues, mortgage rates and the benchmark fed-funds rate moved "in lockstep."
Greenspan can say what he wants. But when the government guarantees the balance sheets of Fannie and Freddie (not to mention every other large bank in the country)... when it encourages the creation of an enormous amount of credit by lowering short-term interest rates to 1%... and when Congress insists on providing loans with no down payments to low-income and first-time homebuyers, you will eventually have a disaster.
There was either no risk, or very little risk, to home speculators. Banks didn't rein in lending because depositors don't care how risky a bank's loan book becomes – their deposits are guaranteed. Fannie and Freddie could buy an unlimited amount of subprime debt (with almost no loss reserves) because they had a line of credit with the Treasury. Greenspan didn't worry about the credit bubble because the market is efficient. Everyone acted like a fool because no one was going to be responsible for his actions.
Parsing the blame accurately is probably impossible, but one thing should be obvious to all of us: Greenspan had a hell of a lot more to do with it than 99% of his fellow Americans, who are now left with a multitrillion-dollar bill to clean up the mess.