You can't say he didn't try, but Alan Greenspan finally agrees that monetary policy can't be used to safely defuse an asset bubble [subscription required]. In today's Wall Street Journal, Greenspan writes, "After more than a half-century observing numerous price bubbles evolve and deflate, I have reluctantly concluded that bubbles cannot be safely defused by monetary policy or other policy initiatives before the speculative fever breaks on its own." He compares our recent mortgage meltdown to the Dutch Tulip craze of the 17th century and the South Sea Bubble of the 18th century.

He also admits some of the Fed's actions may have helped to fuel this bubble, such as lowering the federal funds rate to 1% in mid-2003 and keeping it there for a while. He things teaser rate ARMs also contributed, but the biggest blame can be placed on the expectation of ever rising prices, which is, of course, what inflates most asset-price bubbles.

Greenspan said he and his colleagues at the Fed believed the threat of corrosive deflation in 2003 after the Internet bubble burst needed the temporary 1% federal-funds rate to fend off that deflationary crisis, but he added, "I did fret that maintaining rates too low too long was problematic." It wasn't until mid-2004 that the Fed started raising rates again but by then the current asset bubble was already inflating and impossible to stop.