NEW YORK – Former Federal Reserve chairman Alan Greenspan, whose legacy has been tarnished by the global financial crisis, on Thursday laid out a scholarly defence of why Fed policy did not fuel the housing bubble.

He did offer somewhat of a mea culpa, though, noting that the regulatory system failed by not demanding financial firms hold much larger capital buffers. Mr. Greenspan, who led the U.S. central bank from 1987 to 2006, has been criticized by some analysts who argue he kept short-term, benchmark interest rates too low for too long in the early 2000s.

The former Fed chief defended the central bank’s actions, saying that the seeds of the housing boom were sown by geopolitical events that were out of the Fed’s control, an argument he has presented a number of times in the past.

The fall of the Soviet Union led to hundreds of millions of workers entering the global marketplace, he said in a paper to be presented to a Brookings Institution conference. This new market-based workforce, Mr. Greenspan said, helped push up growth in the developing world. This in turn fuelled a global savings glut that drove down long-term interest rates, leading to an “unsustainable boom” in house prices, he said.

Source: Financial Post