You can't pass this buck, Alan: James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

LONDON (Reuters) - There is enough blame to go around for the global housing bubble, but give Alan Greenspan and the Federal Reserve their due: they did more than their share.

In a piece in the Financial Times titled "The Fed is blameless on the property bubble" Greenspan argues that the debacle was not caused by loose monetary policy by the Fed or lax regulation, but rather by collective foolish behavior by investors which could not be predicted.

For Greenspan, the major cause of the global bubble was the fall in global long-term interest rates, which, as chairman at the time of the most powerful central bank in the world, were apparently nothing to do with him.

Up to a point, Mr. Chairman, up to a point.

The Fed sets U.S. short-term interest rates and is the dominant, but not only, force in guiding long-term ones, which in turn are one of the most powerful forces in determining global interest rates.

And reacting to the shocks of the dot.com bubble and September 11, the Greenspan Fed cut the U.S. benchmark rate from 6.5 percent to 1 percent between 2001 and 2003 and then held it there, only very gradually raising rates in 2004 and 2005 even as the bubble inflated.

"Greenspan is also responsible for those other property bubbles in large part because the climate of low long-term rates which was established by the Fed led to the easy borrowing terms in markets all around the world," said Stephen Lewis, economist at fund manager and private bank Insinger de Beaufort in London.

"To have a one percent rate when the real economy was growing at 4 percent would seem to be highly incautious."

Albert Edwards, global strategist at Societe Generale Cross Asset Research in London, was blunter: "He is the midwife of serial bubbles that are unraveling."

Bubbles from New Zealand to Spain to California developed under varying circumstances, it's true, and it would be churlish to place all of the blame on the Fed and Greenspan, but they must come in for the lion's share.

THE IMPOSSIBILITY OF REGULATION?

There is also the issue of the Fed's "asymmetric" response to asset bubbles, under which it doesn't seek to identify and prick them while they are developing but still must stand by to pick up the pieces in the aftermath, lowering interest rates to ease the pain.

Many economists, while admitting that bubble pricking is a dangerous game, say that a policy of being active only when asset prices fall encourages speculation.

The International Monetary Fund last week called on policy makers to watch and respond to house price movements, in what would be a radical departure from traditional U.S. monetary policy.

"An aggressive easing would be justified in response to concerns from a rapid slowdown of the housing sector, but some 'leaning against the wind' may also prove useful to limit the risk of a buildup of housing market and financial imbalances," the IMF said in its World Economic Outlook.

Greenspan also, seemingly, argues that more regulation would be futile, which, coming from someone who was one of the principal regulators of the U.S. banking and financial system is, well, interesting.

To be effective, he says, regulators have to anticipate the next blow-up, something he believes them unable to do. If you combine that line of thought with rescuing Bear Stearns equity holders and counterparties, you have another "asymmetric" approach to policy.

Much of the fuel that powered the housing bubble was provided by the "shadow banking system" of debt securitization which bought up poorly underwritten mortgages and sold them on, often to entities set up by banks and using bank loans to fund the mortgage purchases.

Power of regulation was fading, but principally due to regulatory arbitrage. Safety and soundness regulations applied to banks in the wake of past crises were being flouted by setting up off balance sheet means of financing that were not subject to the same regulatory scrutiny. It did wonders for bank profits, for a while at least.

But, as we've seen, that "shadow banking system" of bank related and often orchestrated credit was indeed part of the system for which the Fed is responsible.

That is demonstrated by the fact that when the structured vehicles came to grief, many banks took them back onto their regulated balance sheets. And indeed, when things got really bad many of the assets ended up being financed or otherwise underwritten by the U.S. government.

The truth is that more financial regulation is inevitable, desirable and highly likely to fail.

And, unless we somehow magically levitate out of the current crisis, the idea of managing asset prices as part of setting monetary policy will very likely gain in popularity and influence.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. email: saft@reuters.com)

(Editing by Ruth Pitchford)