Too much money IS a glut in the sources of funds available to lenders, which is a glut in credit. How could you not have noticed?

It is hard to get a read on M2 over shorter periods, but when something continues for multiple years, ignoring it is either arrogant or stupid.

And this post was very interesting. However, I wouldn’t press the case of Australia being a good example of a place that is avoiding a house price bubble too hard. By many measures, Australia has one of the biggest bubbles in the world, and it’s still inflating, unlike those in Ireland, Spain, UK and the US.

I’d recommend particularly graph 1 and 7 here – http://www.rba.gov.au/Speeches/2008/sp_so_270308.html

That said, you could say they are “leaning against the wind” (and have in the past), but I don’t really think it’s had much effect.

The former Chief Banking Regulator: “Regulation never works to prevent [fill in the blank].”

The former Chief Banking Examiner: “How could I possibly presume to question heroic financial innovators SO much smarter than I am. I trust in their ability, and so should you.”

The former Chief Interest Rate Micromanager: “Interest rates didn’t balloon they money supply: I kept money close fisted. By the way, credit has nothing to do with money.”

The former Chief Economic Trend Sentinel: “It was malinvestment by ill-educated product buyers which got us in a fix. Who’d a thunk it. It couldn’t have been the products: these were made by genius heroic innovators who are rich so they must have been right. Right?”

Alan Greenspan is and always has been a stranger to the truth with zero sense of personal responsibility. Calling this carpetbagger an ideologue is too kind: his pockets are too well-lined for the weighting in his personal worth to be in his ideas. His pretentions to ideology are, well, pretentious; the man’s a greedy fox who wants to look like he did it ‘for the cause.’ His cause is himself, end of story.

I think this is the crucial point. Greenspan (and I think, for that matter, DeLong in is response to you a little while back) is making the point that there is no theoretical model showing that low Fed interest rates caused the bubble *and* which also has predictive value. I think this is probably correct. There is no economic model with both these features. But then again, there are *no* economic models with just the second feature, i.e. which have predictive value, in the strong sense that Greenspan has laid out. *No* economic model can correctly predict when recessions occur or when financial marekets will collapse. That’s pretty obvious, isn’t it? If there were a good model about when financial markets collapsed, financial markets would collapse a month earlier, because everyone would use the model and start selling beforehand…

So Greenspan is being disingenuous and is setting the bar too high, excluding models which would tend to show that the Fed’s actions were mistaken, by claiming these models don’t work – even though, by the standards he has set out, *no* model works.

I would just point out that Greenspan was famous for being a guy who decided interest rates, not by using models, but by his nose, presumably because he didn’t trust models. IMHO he was right in that; I don’t trust the models myself. But he had a bad nose; it smelled roses, when there really was manure in the garden.

Final point: actually, I don’t think it’s the fact of low interest rates per se that led to the bubble. I think it’s more that, every time the economy looked like it might fall into recession, interest rates were lowered drastically in order to avert recession. This caused a backup of bad practices, a sense that asset prices could go only one way (because they did only go one way), and ultimately led to the mess we are in today.