Blowing bubbles again?

When Alan Greenspan stepped down as chairman of the Federal Reserve in 2006, his reputation had reached iconic status in some circles. With the nickname "Maestro," he was hailed as the architect of the booming, low-inflation economy of the 1990s and early 2000s. "We think he has a legitimate claim," said Princeton University economists Alan Blinder and Ricardo Reis in 2005, "to being the greatest central banker who ever lived."

The financial crisis of 2008 tarnished Greenspan's reputation. He had always had critics who said his policy of reducing interest rates to a very low point for a very long time in the wake of financial problems only served to create new problems-such as the housing bubble. After 2008, this view gained traction. The proximate cause of the crisis, in this view, may have been government policies to encourage people to buy homes they could not afford and banks to lend to them, but it was Greenspan's historic easing of monetary policy after 2001 that provided the liquidity for the binge.

On April 7, Greenspan went before the Financial Crisis Inquiry Commis­sion, a group set up by Congress to investigate the causes of the 2008 meltdown, to oppose this view head-on. He made some mistakes as Fed chairman, he told the commission, but his sharp reduction of short-term interest rates between 2001 and 2004 was not one of them. Greenspan said "it was long-term mortgage rates that galvanized [housing] prices, not the overnight rates of central banks, as has become the seeming conventional wisdom." Those long-term rates, such as for 30-year mortgages, were the result of global economic forces beyond his control as Fed chairman, Greenspan argued.

But critics say this ignores one of the central realities of the housing bubble: The problem wasn't those who took out 30-year fixed mortgages. The problem was the exotic mortgages, such one-year adjustable-rate mortgages with teaser rates that would rise over time. Those rates were very much affected by Greenspan's slashing of the federal-funds rate.

The commission's final report isn't due out until after the November elections. The debate, meanwhile, is anything but academic, because the Fed is in the midst of another round of remarkably easy monetary policy.

On the same day that Greenspan testified in Washington, two Fed leaders went public with sharply different views of the Fed's current near zero federal funds rate. Speaking in Dallas, Fed chairman Ben Bernanke gave every indication that the rate is not going up anytime soon, saying a higher rate could choke off needed growth in the economy. "We are far from being out of the woods," he said. "Many Americans are still grappling with unemployment or foreclosure or both."

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said that view is mistaken and history could be repeating itself. In a speech in New Mexico, he pointed to a quick increase in farmland prices and an "epic comeback" in high-risk junk bonds as potential problems. Holding interest rates too low for too long, he said, "encourages debt over equity and consumption over savings," leading to bubbles. "While we may not know where the bubble will emerge, these conditions left unchanged will invite a credit boom and, inevitably, a bust."

'Something for nothing'

Almost half of all Americans, including many in the middle class, receive so many credits and deductions that they end up paying no income tax, according to the Tax Policy Center. The group points out that most of these Americans pay taxes to support Social Security and Medicare, as well as state and local taxes. But when it comes to the federal income tax to support discretionary spending, only the wealthiest half pays. "We have 50 percent of people who are getting something for nothing," Curtis Dubay of the Heritage Foundation told the Associated Press.