David Stockman took Alan Greenspan to task for stating the following:
I have come to the conclusion that bubbles, as I noted, are a function of human nature.
Essentially, Stockman points out that such a statement points the finger in the wrong direction, for economic bubbles are caused by the expansion of the money supply and cheap credit. Stockman lambasted Greenspan by declaring the following:
[A]fter all this time Greenspan still insists on blaming the people for the economic and financial havoc that he engendered from his perch in the Eccles Building. Indeed, posturing himself as some kind of latter day monetary Calvinist, he made it crystal clear in yesterday’s interview that the blame cannot be placed at his feet where it belongs.
(Bold is original)
This may be a very tricky issue for us Calvinistic Austrians, believers in both the doctrine of Total Depravity and the Austrian Business Cycle Theory (ABCT). Will we take Greenspan’s position, that human nature was the cause; or will we take Stockman’s position, that the Federal Reserve causes bubbles?
The way we can go about answering such a question is by understanding that whether or not there is a central bank, whether or not that central bank engages in fractional reserve banking (as does the Fed), and whether or not the bank is on the gold standard, human nature is always corrupt. Without a central bank fueling economic bubbles, there are no nationalized bubbles (before the Federal Reserve became America’s central bank, economic bubbles were fueled by more locally controlled banks, operating on a fractional reserve basis), but this does not mean there is no corruption in human nature.
Thus, human nature is a constant that is present with or without economic bubbles. On the other hand, central bank credit manipulations are not a given, as they can come and go.
A simple parallel example is that of an airplane. One can certainly blame gravity for the plane crash, but why does gravity not pull every flying airplane to the ground? Gravity is not a viable explanation for the cause of the plane crash even though without it no plane would ever fall. The question is: what about the airplane in a given circumstance gave gravity the opportunity to bring the airplane down? It is far more accurate to blame the plane crash on, say, the loss of fuel or an engine gone bad.
Blaming human nature for bubbles gives Greenspan and the other monetary rulers a scapegoat, a means to get off the hook.
According to some historical reports, the Great Fire of Rome (64 AD) was caused by Nero, who was the arsonist. It lasted for five days and swept through at least ten (out of fourteen) Roman districts. Let’s assume that the historical reports are true, that Nero caused the fire for political purposes (Government never changes, does it?). Should the destruction caused during this five day period be blamed on the activity of Nero or on the fact that fire is destructive to what exists around it?
Humans may have terrible natures, but without expanded credit, how can they possibly fuel an economic bubble? Blame those who create money out of thin air and loan it out, not those who are attracted to the new credit.