If 'Bubble' Bursts, Legacy of Greenspan May Deflate

Three prominent economists often cited as among the leading contenders are expected to attend the gathering. They are Martin Feldstein, a former Reagan administration economic advisor and now a Harvard University economist; Ben Bernanke, a former Fed official and now chairman of President Bush's Council of Economic Advisors; and Glenn Hubbard, Bush's top economic advisor during his first term and now dean of Columbia University's business school.

Many economists who praise Greenspan's overall record nonetheless are critical of his handling of the housing market.

"This will have been the most successful period in the history of the Federal Reserve system," William A. Niskanen, a Reagan administration economic advisor and now chairman of the conservative Cato Institute in Washington, says of Greenspan's tenure. But, he says, the Fed chief made three major mistakes, including fostering banking regulations that helped precipitate today's low mortgage rates -- "a condition that has contributed to what now looks like a housing bubble."

Not everyone agrees that the housing market is a bubble in danger of popping. Housing industry leaders and others say the boom, which has driven up prices by as much as 40% in Southern California and other hot markets in the last two years, is justified by growing population, strong buyer demand and a limited supply of homes. And while double-digit price rises are already slowing in California and elsewhere, thanks in part to the Fed's interest rate hikes, they are more likely to level off instead of plunge, industry leaders say.

For their part, Greenspan and other Fed officials have said they can't and shouldn't target possible bubbles in stocks, housing or other assets, partly because it's hard to know precisely what constitutes a bubble. Policies aimed at attacking bubbles could produce other unwanted side effects, they have said.

Instead, Fed officials have suggested they would seek to ease the aftermath of any bubbles -- as they did following the 2000 stock crash. Their quick efforts then to cut interest rates, experts say, helped make the 2001 recession relatively mild.

But some economists say the Fed cut rates too far, and kept them low too long. The 2001 recession was primarily caused by a pullback in spending by businesses, not by consumers. Historically low rates, designed to stimulate an economic recovery, encouraged consumers and investors to bid up home prices abnormally high, with signs of speculation emerging as early as 2002, says Edward Leamer, director of the UCLA Anderson Forecast and one of the first economists to label the current housing market a bubble.