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With a collapsing housing market, a falling stock market, and a serious economic recession on the immediate horizon, the blame game about who or what has been behind the financial nightmare is in full swing. In recent testimony before a congressional committee former Federal Reserve Board Chairman, Alan Greenspan, pointed his finger at various financial insurance schemes and the inescapable uncertainty of the future. “We’re not smart enough as people,” he said. “We just cannot see events that far in advance.” The one thing he did not admit was that it was his own monetary policy when he was at the helm of America’s central bank that created the boom that has now resulted in a crash.
The ballooning housing market and the rising stock market of the past decade would have been impossible if not for the easy money policy of the Federal Reserve. Monetary expansion through the banking system and resulting low rates of interest fed the housing and stock market frenzy, indeed it made them possible. The graph below shows the growth in the U.S. money supply by several measurements. 
Source: Federal Reserve Bank of St. Louis, Monetary Trends. M-1: Currency in circulation, demand deposits and other checkable deposits, and traveler's checks; M-2: M-1 plus savings deposits (including money market deposit accounts and money market mutual funds, $50,000 or under) and small time deposits ($50,000 or under); MZM: M-2 minus small time deposits, plus larger money market mutual funds ($50,000 or more). Two of these measurements, MZM and M-2, (which measure currency in circulation and various types of checking deposits, time deposits and money market mutual fund accounts) have exploded over the last 10 years. They have increased between 72 percent (M-2) and over 100 percent (MZM). Even if we only look at the period, 1999- 2007, before the Federal Reserve turned on the monetary spigot even more to try to counteract the emerging financial crisis, the rates of expansion were still huge: 60 percent (M-2), and 83 percent (MZM). Over the last 10 years, real Gross Domestic Product has grown 32.4 percent. By any standard, the rate of monetary increase has been far in excess of any amount required to facilitate the transactions of an expanding economy. At the same time, the monetary expansion dramatically pushed down market interest rates, especially when adjusted for inflation. The graph below traces out the pattern of real interest rates in the U.S. during the last 10 years. Source: U.S. Department of the Treasury, Federal Reserve Bank, D.C. Real Interest Rates equal nominal interest rates minus the year-over year Consumer Price Index rate of inflation. The Federal Funds rate, the rate of interest at which banks lend money to each other, is targeted by the Federal Reserve as an important policy tool. It is influenced by the amount of money the Fed makes available to the banks through Open Market Operations. Between 2001 and 2005, the Federal Funds rate was either negative or well below 2 percent in real terms. In other words, the Federal Reserve supplied so much money to the banking sector that banks were lending money to each other for free for a good part of this time. No wonder related market interest rates were also pushed way down. The yield on 1-year Treasury securities, as seen in the graph, was also near zero or negative in real terms for the middle years of the last decade. Conventional mortgage rates for home buyers--again, in real inflation-adjusted terms--fell dramatically, from barely 4 percent in 2001 to less than 2.5 percent in 2005. It was still well below 3.5 percent at the end of 2007. If there was any “irrational exuberance” in the market place, as Greenspan called it during the boom years that have now ended, the responsibility lies with Federal Reserve System over which he was the chairman until the end of January 2006. With the financial markets awash in Fed-created money, credit-worthy standards were lowered, “inventive” financing was introduced to make it possible for the credit-unworthy to obtain home loans, and for others to have access to large sums of money for speculative buying at low margins. Greenspan was certainly right that an uncertain future makes it difficult to predict when speculative bubbles will burst. But it was not unpredictable to know that years of easy monetary policy and accompanying near zero or negative real interest rates were creating an unsustainable boom that was setting the stage for an inevitable great crash.
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For years the central banks kept inflating a bubble.These wall street criminals and their friends, have not apologized to the world and the people who are getting hurt by their policies.
Every year the fed kept expanding credit by printing wealth/money out of thin air , until there was so much credit out there , that the credit crunch of trillions of dollars became too big to survive for many in the western financial system.
Every problem was a license to expand credit The pain of market discipline and the course of recessions is never acceptable. The pleasure of postponing hard decisions and enjoying for a while longer the short-term benefits gained by keeping the financial bubble inflated policy made rotten politicians look good, as there were never any major downturns .
In the process of credit expansion ,they hurt pensions as interest rates decreased and returns diminished.This was theft from the people who worked hard and saved for pensions.By credit expansion they were robbing the lenders i.e pension funds
What effect does this have on the money supply, and how does it affect the Fed's ability to achieve it's targets?
Fractional reserve banking with a zero fraction of reserves results in the false notion that there can be permanent investment without savings. Thus, the appearance of imaginary wealth.
Relaxing required reserves all the way to zero was an ill-conceived attempt at monetary expansion without actual monetization. At least not until this September. It also has a nasty corollary: As the Fed didn't really control the credit expansion, it can't really control the contraction either.
All the bail-out money from the Treasury is actually deflationary. When money is paid to a bank, it just ceases to exist. Before payment, there was a bank account balance. After payment, poof, the balance is gone. Only debt remains...
Plain old monetary expansion brings resilient inflation. Unsound credit expansion results in inflation and deflation in quick succession. A kind of Ponzi scheme where banks just pretend to invest money productively, but are in fact just paying the old investors with the freshly signed promissory notes from newcomers. Everybody is rich because everybody promises to pay everybody else huge sums in the future.
Good job, Mr. Greenspan.
Part of the reason, in my opinion, is the image that Greenspan succeeded in creating about himself as the careful, thoughtful, factually cautious monetary central planner.
In fact, the Federal Reserve, under his leadership as Fed chairman, put the economy through two signficant downturns -- first, when the "high-tech" bubble burst in 2000-2001 after monetary excesses of during the second half of the 1990s, and now a second time with the housing and related financial crises caused by his monetary policies between 2003-2006.
He seems to be the "teflon" Fed chairman.
The reality is, under his "watch" at the Fed, we have now been put through two business cycles.
I don't consider this a legacy to be pround of.
Richard Ebeling
The bubble peaked at the end of his term and he's rarely blamed for the mess that we're in right now. I believe he's the biggest culprit as this balloon imploded under his watch. Bernanke was just left to clean up his mess.
Ever since 2006 housing prices across the country have seen double diget drops and in states like california it's close to 50% drop in value for some cities like Riverside, CA.
Sources: http://www.homepricetrend.com