In his book, Greenspan, historically one of the economy’s biggest boosters, is remarkably pessimistic about the prospects facing the United States, and not just because a recession might be in the cards. In addition to one of the grave fiscal challenges facing the country—the retirement of the baby boomers—he expresses concern that the rate of technological innovation is slowing down.

Really? In the 1990s, Greenspan famously espoused the view that advances in information technology, such as the development of ever more powerful computer chips and the building out of the internet, had permanently increased the economy’s growth capacity. Granted, the Labor Department’s productivity figures didn’t initially provide much evidence to support this argument. Nonetheless, Greenspan kept interest rates low so that the economy could reach its enhanced potential. In 1996, productivity figures started rising steadily, and Greenspan was vindicated.

Unfortunately, his repeated expressions of optimism helped stoke the bubble in internet stocks, as did his decision in the fall of 1998 to lower ­interest rates by another three-quarters of a percentage point following the crisis at Long-Term Capital Management, a giant hedge fund that had made some bad bets. Rightly or wrongly, many people on Wall Street concluded that should the stock market get into serious trouble, the Fed would come to its rescue. This was the famous “Greenspan put.” During the ensuing 18 months, the Nasdaq jumped 3,000 points, and names like Webvan, eToys, and Pets.com entered the national lexicon via initial public offerings.

As the speculative fever raged, some old-timers and sticks-in-the-mud, myself included, urged Greenspan to raise interest rates and tighten margin requirements. He refused, on the grounds that bubbles are impossible to identify definitively. Pricking them is by no means easy, and even if you succeed, the consequences are far from certain. The best course of action, Greenspan argued, was to let a bubble deflate of its own accord. Then, and only then, you take remedial action by cutting interest rates. That was what he did. Following the stock market slump and the events of September 11, 2001, he cut the federal funds rate to 1.75 percent, a level that had not been seen since the early 1960s. Then, in June 2003, he reduced the rate even further, to 1 percent.

Now, when managing an economy, emergency action is sometimes called for. A market collapse twinned with a large-scale terrorist attack was something new and frightening. By the middle of 2002, however, it was clear that for whatever reason—low interest rates, the Bush tax cuts, increased military spending—the economy was staging an amazingly robust recovery. At that point, history and economic orthodoxy suggested that the Fed should have been tightening policy rather than loosening it.

Again, Greenspan went his own way. Citing fears (which proved to be misplaced) of Japanese-style deflation spreading to the United States, he kept the federal funds rate at 1 percent until June 2004, by which point the economy had been growing steadily for more than two years. By failing to tighten monetary policy, Greenspan created an apparently limitless supply of cheap credit.

After adjusting for inflation, the cost of cash was close to zero. Investment banks, hedge funds, and other financial operators were able to obtain money at minimal cost and use it to finance risky investments. To a lesser extent, so could ordinary Americans. In a feat of levitation almost without precedent, the prices of nearly all speculative assets moved in the same direction: U.S. stocks went up; foreign stocks went up; residential real estate went up; commercial real estate went up; oil went up; gold went up; sugar went up; coffee went up; Treasury bonds went up; junk bonds went up. To make money, all you had to do was suit up, buy something, and sit back and watch it grow.

In the real estate market, lenders competed frantically to make loans, and speculators flipped condos like burgers. With so much cheap money sloshing around, lenders had to work hard to find enough borrowers to mop it all up. At any one point, there is a limited population of folks who (a) need a new mortgage and (b) are capable of servicing one. So the lenders extended their attention to people who wanted loans but couldn’t afford them; hence the rapid growth of interest-only mortgages, no-doc loans, and even “ninja” mortgages (no income, no job or assets). In the beginning, money-center banks like Citigroup and Bank of America shied away from issuing loans to low-grade borrowers. But as specialist mortgage providers, including Washington Mutual and New Century Financial, started to eat away at their market shares, the respectable bankers became convinced that they had no choice but to compete with them. On Wall Street, meanwhile, a parallel race to the bottom was under way. Firms like TCW Group and BlackRock were busy packaging subprime loans into mortgage-backed securities, credit-default obligations, and other exotic instruments, which were then unloaded on gullible investors searching for a higher yield than Treasury bonds were providing. As the innovative newcomers started to make hefty profits, established investment banks like Bear Stearns, Goldman Sachs, and Lehman Brothers raced to catch up. Eventually, even firms that had shunned the risky new field of structured credit, such as Morgan Stanley, joined the fray.