"Doubtless each individual housing bubble has its own idiosyncratic
characteristics and some point to Federal Reserve monetary policy complicity
in the US bubble. But the US bubble was close to median world experience and
the evidence that monetary policy added to the bubble is statistically very
fragile. Paul De Grauwe, writing in the Financial Times' Economists' Forum,
depends on John Taylor's counterfactual model simulations to conclude that
the low funds rate was the source of the US housing bubble. Mr Taylor (with
whom I rarely disagree) and others derive their simulations from model
structures that have been consistently unable to anticipate the onset of
recessions or financial crises. Counterfactuals from such flawed structures
cannot form the basis for policy."
Of course the evidence is going to be "statistically very fragile". As any attempt to compare sets of completely different dependent variables would be.
However, Counterfactuals are something we use extensively here. Briefly, one asks something like this: "If its not raining, then it cannot be cloudy." Or in the above context "if the fed funds rate was not low, then there would not have been a U.S. Housing bubble".
Counterfactuals are a tool, like everything else. We have found that this tool is incredibly difficult to use when large numbers of independent variables are involved. Stripping out historical phenomenon in a study and concluding a future outcome is something we have not been able to do with any degree of confidence...in large scale macro-studies.
All this being said, Mr. Greenspan's vigorous defense of his pump-priming monetary policy is amusing, and reminds me of the following (paraphrased)quote from a friend: "The major career choice for former central bankers is ascertaining what their former colleagues are likely to do." It did not take long for PIMCO to hire Mr. Greenspan as a "consultant".
A rule of thumb: when networking is valued over accurate forecasts, one should be very, very skeptical of the output, and Mr. Greenspan has talked for hundreds of hours and wrote thousands of words on the subject.