Ex-chairman says the sub-prime woes are all Wall Street's fault: he's wrong. Tom Sowanick is CIO of Clearbrook Research, part of Clearbrook Financial, a Princeton, N.J.-based wealth-management service provider.

In Monday's editorial section of the Financial Times, former Federal Reserve chairman Alan Greenspan penned a piece entitled "The Fed is blameless on the property bubble."

But how is it that everyone is to blame for the current credit crisis except the Fed? "The core of the sub-prime problem lies with the misjudgments of the investment community," Greenspan argues. Although this may be correct with respect to the securitization of loans, he ignores the fact that the Fed facilitated the problem in the first place.

Immoderation

The Fed did this by holding interest rates steady at 1% from June 2003 to June 2004. This created a belief that the US economy and (by easy extension) that its financial system had entered into an unprecedented era of moderation: moderate growth, moderate inflation, and moderate interest rates. The Fed facilitated the hyper-growth of structured products by keeping interest rates so low for so long.

As Greenspan articulated his views on this moderation he was also signaling that market volatility and yield curve shifts would also be moderate. Investors would need to search harder for income-producing assets in an environment where income (yield) was expected to remain low, even by historical standards.

Whence the rise of structured products.

Fast forward to August 2007 and the fed funds rate had been pushed, without moderation, to 5.25% from 1%. A five-fold increase in the fed funds rate isn't moderate by any standard.

The second problem the Fed created was the "yield-curve conundrum." This occurs when long-term yields are less than short-term rates. In August 2007, six-month Treasury bills were offered at 4.9%, while 10-year Treasury notes were 4.7%.

Wall Street economists presented eloquent arguments as to why the negative slope of the yield curve was the new normal. Long-term rates would remain low thanks to pension demand of long-term fixed assets. The taming of inflation would also keep real rates low. The Fed did little to dissuade the investment community from creating fixed income assets that were structured to fail when the yield curve steepened with long-term rates rising.

With all due respect to Greenspan, he needs to accept the fact that he did little to warn the investment community of the risks it was about to face. The SEC was asleep at the wheel. Rating agencies were granting AAA ratings with little justification. Investors were sold auction rate notes as if they were truly money-market instruments, only to discover that many of these instruments were really 30-year bonds.

There is plenty of blame to go around and Mr. Greenspan shouldn't hide from the fact that the Fed helped create the trouble we face now. -FWR