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Alan Greenspan will go down in history as the person who has
done more damage to the U.S. economy and society that anyone who was
not a foreign enemy. In fact the destruction he wreaked through his
incompetence would also exceed the damage caused by almost all wouldbe
enemies as well.
Greenspan accomplished the remarkable feat as Fed chair of
ignoring the growth of the $8 trillion housing bubble. This bubble could
not have been easier to see if it had been 500 feet high and lit up with huge
neon signs saying "Huge Housing Bubble." But Greenspan insisted the
bubble was not there.
And Greenspan somehow didn't recognize that the collapse of this
massive bubble would devastate the economy. The bubble was generating
over $1 trillion in annual demand through its direct impact on housing
construction and its indirect impact on consumption through the housing
wealth effect. This demand would inevitably disappear when the bubble
burst, leaving a huge hole in demand.
Did Greenspan think that the private sector had some magic
formula to replace this demand? What could he have been thinking or
smoking?
If we had a political debate that was driven by evidence, where the
accuracy of one's past judgements played any role in the credibility
granted their current opinion, then Greenspan would be relegated to the