Blaming the Fed

Hans F. Sennholz’s “Blaming the Fed” is a post-dot-com monetary polemic that reads the market collapse as the exposure of Alan Greenspan’s celebrated reputation and of the Federal Reserve’s deeper institutional failure. It is not simply a personal attack on Greenspan. Sennholz uses him as the visible agent of a monetary regime that, in his view, converts political discretion over money and credit into recurring cycles of boom, malinvestment, and recession.

It is surely more shameful to lose a good reputation than never to have had one.

The essay’s first movement disputes Greenspan’s defense after the crash. Greenspan is presented as arguing that central bankers cannot know when an asset bubble exists and cannot safely prick one once it has formed. Sennholz reverses both claims. He argues that the 1990s furnished abundant contemporaneous evidence: extreme price-earnings ratios, NASDAQ speculation, debt-financed mergers, corporate stock buybacks, commercial borrowing, rising consumer debt, falling saving, and external imbalance. These indicators are not treated as disconnected excesses but as marks of credit-fueled distortion.

Soaring levels of commercial and industrial indebtedness also pointed to the growth of a financial bubble.

In this evidentiary section, Sennholz repeatedly turns valuation and balance-sheet facts into a critique of central-bank judgment. Over-the-counter and new-venture securities matter because their normal risk profile should restrain valuations; when such markets participate in euphoric pricing, Sennholz sees confirmation that cheap credit has altered investor conduct. The Fed, on this reading, did not merely fail to forecast a crash. It encouraged the conditions under which speculation became rational for market participants chasing liquidity-driven gains.

Over-the-Counter securities generally represent high-risk investments in new ventures which command rather low price/earnings ratios.

The middle of the essay shifts from diagnosis to culpability. Sennholz concedes that rhetorical warnings alone would not have deflated the boom, but insists that the Fed possessed concrete instruments: margin requirements, reserve requirements, the discount rate, and open-market operations. Its failure was therefore practical as well as intellectual. Greenspan preferred gradualism, popularity, and expansionary accommodation to the unpopular discipline that tighter money would have imposed. The resulting crash is cast as the necessary correction of errors that policy had permitted and enlarged.

The argument then widens historically. Sennholz places the Federal Reserve within a longer American history of privileged banking institutions, government debt, and managed currency. This history is central to the essay’s Austrian structure: bubbles are not accidental anomalies inside an otherwise stable monetary order; they are endemic to regimes that separate money creation from market restraint.

Economic bubbles have plagued the American economy ever since the First United States Bank opened its doors in Philadelphia in 1791.

From this premise, the Fed’s mandate appears self-contradictory. It is asked to stabilize a system by manipulating the very credit signals on which market coordination depends. Interest rates held below market levels stimulate borrowing, raise asset prices, invite speculative leverage, and draw resources into projects that cannot be sustained once credit conditions change. Sennholz’s blame therefore operates on two levels: Greenspan is faulted for evasive leadership during the 1990s, but central banking itself is faulted as an inherently destabilizing political monopoly over money.

The final movement applies the same logic beyond equities. Sennholz warns that monetary easing after the stock-market decline may shift speculative pressure into housing, Treasury securities, precious metals, collectibles, or other assets rather than restore sound production. Recovery, for him, requires liquidation, saving, and the reallocation of labor and capital away from bubble-era mistakes. Rate cuts and renewed credit creation postpone that process and risk a new fever in another market. The essay’s enduring significance lies in this disciplined extension of the dot-com postmortem into a general hard-money critique: the visible culprit is Greenspan, but the deeper antagonist is discretionary central banking itself.