Former Federal Reserve chairman Alan Greenspan is now squarely in the bulls-eye, held largely to blame for the housing bubble that has blown up in the country's face, because he and the central bank kept rates down at 1% for too long.

Greenspan has also been laughed out of the room for saying that the Fed can not prick any incipient asset bubbles whatsoever by raising interest rates.

Guess what. The economic data show Greenspan is right, that the Fed is not solely responsible for asset bubbles, though it sure can help foster them. Asset bubbles too are devilishly hard to deflate with rate hikes. Moreover, though the Fed was wrong to keep rates down for so long, thus ballooning the bubble and creating inflation, it's wrong to scapegoat Greenspan as the sole creator of the housing bubble when other more appropriate villains are getting off scot-free (and walking away with fatcat pay). It's time to stop scapegoating Greenspan.

Start at the beginning, when Greenspan first talked about "irrational exuberance," which many took to mean he was referring to the dotcom bubble of 1999 to 2000. Some critics say that, if Greenspan was warning about the bubble back then, why didn't he do more to stop it?

But Greenspan wasn't referring to the dotcom bubble.

When Greenspan made that comment in a December 1996 speech before the American Enterprise Institute, he made it not in reference to the Internet bubble, but in reference to the economic downturn in Japan.

Greenspan asked in the speech: "But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?"

There is no evidence that the market was in bubble territory in 1996 when Greenspan said this oft-quoted line a dozen years ago.

The bubble had yet to inflate in the Internet and telecom sectors until three years later, when the Nasdaq really started to take off in 1999 due to the dotcom mania and due to corporate computer spending to avoid the Y2K mess.

Still, the thinking is, Greenspan should have seen the dotcom bubble and raised rates to stop it.

But the Fed did in fact raise interest rates six times from June of 1999 through May 2000, until the Fed funds rate topped out at 6.5%, at that time the highest level in nine years.

However, tech investors scoffed at the Fed's rate hikes when the dotcom mania was in full swing from 1999 to 2000, noting that tech companies wouldn't be hurt by these rate increases because they had microscopic debt on their balance sheets.

And non-tech stocks were never in a bubble during from 1999 to 2000. Knock out the soaring  tech and telecom stocks from the S&P 500, and the stocks left were actually turning down when the S&P 500 hit its all-time high in March 10, 2000, as Jeremy J. Siegel, a finance professor at Wharton University has pointed out.

Moreover, from that peak in March 2000 through the end of November 2006, non-tech stocks had an annual return of 8.2%, clearly not a bubble return, Siegel adds.

And what would have happened to these non-tech stocks if the Fed had raised rates even higher and more rapidly beginning in late 1999 or early 2000?

Siegel says that these non-tech, ‘brick and mortar' companies "would have borne the brunt of the tightening" and their stock valuations would have been pounded down even lower. He adds that the economy could have tipped into a deeper recession, worse than when the tech bubble finally blew up.  

Greenspan was wise to cut rates in the early part of this decade, Siegel says. That's because the country was battling both a recession, due to a desolating dotcom implosion,  as well as 9/11, plus Enron and WorldCom was bearing down on the stock market. The bear market didn't let up until March 2003. Remember, Wall Street was screaming for even deeper cuts at the time.  

Now for the housing bubble. The critics charge that Greenspan tarried too long to hike rates while the housing bubble was ballooning. The Fed first started knocking down rates in January 2001, from 6.5% eventually to a puny 1% in June 2003. The Fed then kept that 1% rate until June 2004, eventually hiking it to 5.25% in June 2006, where it sat until Buzzsaw Bernanke began slashing it last year. Critics say by keeping the rate at 1% for a year, the Fed artificially swamped the system with liquidity and inflated a more lethal echo bubble, the housing bubble.

But that thinking misses the mark.  

House prices were rising because mortgages were becoming cheap not just because of the Fed rate cuts.

Around the world a tsunami of money printed by central banks overseas was pouring into hedge funds, private equity funds, sovereign wealth funds, you name it, money that sought a safe haven after the Internet bubble burst. To be sure, the Fed here is rightfully criticized for printing too much money.

But central banks overseas are more prone to gunning the printing presses as they tend to be more beholden to politicians desperate to keep a lock on power by appeasing their populations, notably in emerging economies--Russia, India, China, all have seen annual monetary growth of 20% or more.

That money came flooding to US shores and into long term treasurys, knocking down these yields, which mortgage rates are tied to, and which the Fed doesn't control.  

Yes, adjustable rate mortgages are tied to short-term rates.

But the Fed started hiking rates in 2004, well before the subprime mess started to escalate in 2005.

Look at the government data, and you'll see that subprime mortgages made up less than 10% of mortgage originations in 2003, a number that ran up to 28% in 2006--when the Fed stopped raising rates.   

And isn't it true that a housing bubble had taken hold in England, Spain, Ireland and Australia, where central bankers have different rate regimes and where central bankers were largely holding the line on lowering rates?

Yes the Fed cops should have used its regulatory powers to stop miscreant subprime lenders who had gone off the rails. And yes Greenspan should not have told consumers, many of whom were unsophisticated, in 2004 to get ARMs instead of long-term, traditional 30-year loans. Especially when the Fed sheriffs were not on the stick watching shady lenders. Greenspan advocated ARMs in 2004 by citing a Fed study suggesting borrowers could have saved tens of thousands of dollars in the prior ten years if they had these loans.

Also, it's unfortunate that Greenspan at that time seemed to encourage lenders to cook up more mortgage products. "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage," Greenspan had said.

But it's wrong to solely blame Greenspan for the subprime mess. Blame Wall Street and hotshot, derelict lenders too.

When Congress opted not to lift the dollar amount of the mortgages that Fannie Mae and Freddie Mac could buy and repackage as securities on the secondary market early in the prior decade, Wall Street gladly dove in.

Wall Street bought those loans from places like Countrywide (CFC), sliced those loans up into all sorts of exotic securities even the Street could not understand, and then sold them as Frankenstein, mortgage-backed securities to investors. Remember, we are talking about sharks who could sell fertilizer to the guy who cleans up after the elephants in the circus.

Countrywide then used that money from those securities sales to make even more loans, creating an ever-growing, steroid-boosted hamster wheel of profits, until the wheels came off that company.

In turn, Wall Streeters willy-nilly assigned values to this $2t of asset-backed debt based on their own internal models, in turn cooking up the earnings it booked off of these securities sales. It then wrote itself big fat bonus checks off these goosed-up earnings and shoved a lot of these junk securities off its balance sheet into structured investment vehicles, or SIVs, to protect its earnings even further (though that move is falling apart).

Time to rethink the blame game.