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Who's to Blame for the Economy? The Fed

Stocks in this article: BACCAIG

Each day this week, a different writer from TheStreet.com will make the case for why one of five prime culprits -- the banks, Congress, irresponsible home buyers, the Federal Reserve or the rating agencies -- is most to blame for the credit crisis and ensuing economic meltdown.

Alan Greenspan was lauded by Wall Street as the maestro for his role in presiding over a 9,000-point rally on the Dow Jones Industrial Average over his 18 years as chairman of the Federal Reserve.

But on the way to becoming "the greatest central banker who ever lived," a funny thing happened: The maestro played a key role in inflating a credit bubble that has put the global economy in its most dire straits since the Great Depression.

chart

Clearly, there is plenty of blame to share among many parties for our current predicament. Homeowners bit off mortgages larger than they could chew, aided and abetted by an overzealous Congress bent on making homeownership dreams come true for record numbers of Americans.

Banks, emboldened by an era of deregulation that minimized risk (for them, unfortunately, not for the global financial system), were only too eager to make home loans to consumers who couldn't afford them, then profit off securitizing and trading them.


Who is most responsible for the credit crisis and the recession?

Banks
Congress
Federal Reserve
Ratings agencies
Irresponsible home buyers

But Greenspan's stewardship of the Fed was the most significant constant in the nearly 20 years preceding housing prices hitting their apex in 2006. Appointed by Republican President Ronald Reagan in 1987 and reappointed four times by Republicans George H.W. Bush and George W. Bush and Democrat Bill Clinton, Greenspan occupied the economic bully pulpit at a time the seeds of excess were sown.

The main criticism of Greenspan has centered on his decision to aggressively lower interest rates in the wake of the dot-com bubble's bursting in 2000, and keep them low too long. As the country battled recession, the Fed cut rates to 1% in June 2003, and did not begin to raise them again until a year later.

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