…It is also important to see how the events of the last decade are being rewritten rather rapidly, most particularly, Iraq is being sent down the memory hole. Even economists who admit that the Federal Reserves very low interest rate policy of the middle part of the decade contributed to the credit bubble, seem to have forgotten why this was done. One part was in response to the dot com crash, but the other part was to accommodate the Iraq War. By running low interest rates, the Federal Reserve enabled an administration that wanted guns, butter, and no new taxes. This is hardly a hands off approach to central banking. Greenspan argued for administration policies, including the ill-considered tax bills of the early 2000’s and the “ownership society” which pushed home ownership.
Thus the most important proximate reason for this crisis is being overlooked entirely. It was not the fraud of banks, nor global imbalances that were the driver, but the fraud of the policy of monetizing homes to borrow money to pay for a war that would not return. If there was a ponzi scheme, the first and foremost runner of it, was Bernanke himself, who architected an economic policy which pushed for monetizing homes now, and profitizing revenue now. It is also impossible to look at the academic record and not see that the past was not one of great moderation, but of a radicalism of the right, which was confident in its ability to deal with problems laid out during the Depression by use of new tools of macro-economics.