In his most detailed examination of the causes of the financial crisis, Alan Greenspan, the former Federal Reserve chairman, acknowledges that the Fed failed to grasp the magnitude of the housing bubble but argued that its policy of low interest rates from 2002 to 2005 did not cause the bubble.
In a 48-page paper that he is to present on Friday at the Brookings Institution, Mr. Greenspan, who stepped down as Fed chairman in January 2006, expressed some remorse, but stood by his conviction that little can be done to identify a bubble before it bursts, much less pop it.
“We had been lulled into a sense of complacency by the only modestly negative economic aftermaths of the stock market crash of 1987 and the dot-com boom,” Mr. Greenspan wrote. “Given history, we believed that any declines in home prices would be gradual. Destabilizing debt problems were not perceived to arise under those conditions.”
Mr. Greenspan added that raising capital requirements and liquidity ratios was the most effective response to blunting the impact of future crises. He suggested that discussions underway in the United States to watch out for systemic risks to the financial system would be of limited use.
“Unless there is a societal choice to abandon dynamic markets and leverage for some form of central planning, I fear that preventing bubbles will in the end turn out to be infeasible,” Mr. Greenspan wrote. “Assuaging their aftermath seems the best we can hope for.”