Did Greenspan Print too Much Money? Ask Him

What we're seeing now is a perfect example of what Hayek warned us about - a central-bank inspired boom/bust cycle. My good friend Mark Skousen reminded me in a recent email that I forgot to give Hayek et al their props (my word, not his) in a recent article I wrote about our central bank role in our current central financial problem. In Hayek's view, when the central bank prints too much money, that money has to go somewhere first. The first market it hits shows unusual growth which creates the illusion of greater prosperity than actually exists. In our system, the money goes to the banks first. Eventually the money works its way through the affected asset class and into the rest of the economy and the asset bubble either pops or deflates.

Sometimes this cycle is huge (like in the 20s and 30s, which Hayek predicted). Sometimes it's quite small like now. However excess money always goes somewhere. In 2003, it appears that this money went to sub-prime mortgages.

So the question is "Who is to blame?". Last evening, Larry Kudlow made a great case on his show Kudlow & Co in defense of Greenspan. He cited GDP, Dow Jones Industrial Average, the unemployment rate and average CPI in his case. He's right about these stats, however all but the last one are growth measurements, not money supply measurements. In other words, the President's tax cuts get the credit for those. Accordingly to Larry the Fed accommodated the supply-side tax cuts by printing the extra money that an economy needs when it's expanding. I think that Larry is right. But did Greenspan go too far? Let's ask him...

"When the Fed cut interest rates to the lowest level in a generation to avoid a severe downturn, then-Chairman Alan Greenspan anticipated that making short-term credit so cheap would have unintended consequences. 'I don't know what it is, but we're doing some damage because this is not the way credit markets should operate,' he and a colleague recall him saying at the time." How Credit Got So Easy And Why It's Tightening - WSJ.com

Greenspan knew at the time that he was going too low, he judged that the risk of stagnation was greater than the risk of an asset bubble. He did the best he could with the tools he had. I think history will record that he moved in the right direction, but a little too far; that he created a small sub-prime bubble which was blown vastly out of proportion by a fear-mongering and real-story hungry press; that he didn't put quite as much faith in supply-side tax cuts as he should have. I think that he knows that already.