Another major financial crisis is inevitable, that is the word from former Fed Chairman Alan Greenspan. Speaking to the BBC, Greenspan said," The crisis will happen again, but it will be different." The next time, he predicted, the crisis would hit the hardest in the UK, but in any case, it will be impossible to stop.

The reason? According Greenspan the next crisis, just like the most recent one, stems from "the unquenchable capability of human beings when confronted with long periods of prosperity to presume that that will continue."

Elaborating on that theme, the former Fed chair continued, arguing: "human beings begin to take speculative excesses with the consequences that have dotted the history of the globe basically since the beginning of the 18th and 19th century…. It's human nature: unless somebody can find a way to change human nature we will have another crisis."

Without doubt, Greenspan is correct, if his insistence on blaming human nature is viewed in a very narrow sense. Sadly, he is being disingenuous at best in laying the blame purely on human nature. 

The operation of a market economy depends upon human nature, i.e., the propensity for individuals to make the choices they deem best based on their own self interest. Not only is it intrinsically necessary for any free people to be able to determine the use of their own property without any outside interference or conversion, it is absolutely essential to the proper operation of a market economy. Consequently, Greenspan is correct; human interest is at the bottom of our economic system, and consequently its recent and historic woes. While human nature is absolutely the foundation of the economy, that does not mean the blame can be assigned to human nature in the abstract for our present and past economic woes. The most recent economic crisis makes for a convenient example. The late crisis, as was widely and accurately reported, stemmed from a bubble in housing that was caused by over investment of funds in that sector. The funding for that spending came as a result of very loose credit. In other words people borrowed massive sums in order to pay for their real estate purchases.

The question is, why would they do this? The answer lies with the monetary policies that Greenspan himself presided over during his long tenure at the Federal Reserve.

Especially the post-2001 era, the United States pursued an aggressive policy of monetary growth — in other words the money supply was rapidly increasing. When the money supply increases, the value of each dollar becomes worth less over time. This, however, has an interesting effect on several factors.

First, an increasing money supply encourages deficit spending. In other words, it is much more attractive to be a debtor than a saver in such an economy. The saver sees the value of the money saved reduced over time by the increase of the money supply. Meanwhile, the debtor, in the same economy, sees the value of the money owed decreased over time, making it more attractive to take on debt when the money supply grows.

Second, as the money supply grows and more and more people see the benefit of taking on more debt as opposed to saving, the money they receive from lenders flows back into the economy as they make purchases, driving up demand. As demand grows, so do valuations -- and this is exactly what happened in the housing industry, creating the bubble.

Over the course of the last 8 years, more people with more easy credit found that housing was the best place to stash their recent windfalls. The demand for housing increased, driving up housing prices. Investors saw those prices rising, and that reinforced the idea many held that investing in real estate was a sound choice, and still more people obtained even more money on loan to do just that.

But, like any bubble, this one would eventually pop.

Ultimately, human nature played a role, but only because government manipulation of the money supply created the conditions that encouraged dangerous investor and consumer behavior. Consequently, the fault lies not with human nature, as Greenspan claims, but with those who manipulated human nature by manipulating the money supply.

And for 18 years, it was Chairman Greenspan at the controls.

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