One of the things that President Bush surprisingly did not say in his State of the Union speech last week was how grateful he was to Alan Greenspan for his 18 years of service as chairman of the Federal Reserve Board. Democrats, especially, must have thought this pretty ungracious, since they have often accused the outgoing chairman of tilting the Fed in a Republican direction. Harry Reid, the Democratic leader in the Senate, perhaps having a bad day, once went so far as to call Greenspan—avowed supporter of low taxes and Social Security reform—"one of the biggest political hacks ... in Washington."

At the other extreme, quite a few screwball conservatives accuse the former chairman of deliberately suffocating the economy with punitively high interest rates. (High interest rates? Any such critic who took a look at the European Central Bank's interest-rate policy would surely have a stroke.) Why would Greenspan keep rates higher then necessary, you ask? Apparently out of sheer sado-monetaristic lust for low inflation.

An even smaller group of even odder people actually applaud those same ruinously high interest rates—recognizing, as they do, the deeper significance of the rates as instruments of a plot inspired by Ayn Rand (whose work Greenspan does, in fact, admire) to flatten the economy and clear the way for truly unfettered capitalism. Thus, despite the president's silence on the matter, Greenspan has little to worry about as far as his reputation is concerned: With enemies like these, who needs friends?

But some have advanced a more reasoned and intelligent, albeit less exciting, critique of Greenspan. This view has been pushed over the years, with impressively dogged persistence, by the editors of The Economist (esteemed former colleagues of mine). The magazine's farewell to the Fed chairman in its January 14 issue was not exactly a bouquet. Spoiling the orgy of congratulation, The Economist restated its principal complaint: At various points, Greenspan held interest rates too low for too long. This allowed two big asset-price bubbles to develop during his watch, the first (which has since burst) on Wall Street and the second (which is still inflating) in the housing market. The charge is that Greenspan could and should have done more to contain those bubbles. And the price of that failure may yet have to be paid. If the house-price bubble should suddenly deflate, for instance, or if foreigners (whose credit has financed the bubble's expansion) should refuse to keep lending at low rates, the economy might fall into recession.

Greenspan's legacy, in this view, is a set of related and severe financial imbalances. In due course, these will have harmful real consequences—and they will sorely test his successor, Ben Bernanke.

You will not be surprised that I believe The Economist is basically right. First, though, some qualifications. If you are going to criticize Greenspan, you have to acknowledge that his record to date on inflation and growth is good—better than good. And you have to grant him some credit for the fact that the first bubble (even if he helped to inflate it to begin with) burst with little harm, thanks to Greenspan's bold action after the stock market rout of 2000. The dot-com crash should have caused a severe recession. It did not, and that fact goes some way to vindicate Greenspan's answer to the asset-price problem. In his view, it is better to let asset prices (house prices, share prices) inflate and deflate as they will, and then deal with the economic consequences, rather than try to steer asset-price inflation as an objective in its own right. He put that theory into practice before and after 2000, and taking the episode as a whole, it is not easy to argue that he got it wrong.

And while we are conceding points to the Greenspan worldview, here are two more. Judging whether a rise in asset prices is a bubble is a lot easier after the event than it is at the time. I was more inclined, I think, than I should have been to regard the dot-com share-price boom as nothing but a bubble. At the end, it plainly was a bubble—as events subsequently demonstrated. But some substantial rise in share prices, and more than I was willing to allow at the time, turns out to have been justified: The productivity miracle of those years was not quite as miraculous as its most visionary advocates insisted, but it was not nothing. Price accelerations that are later judged to be bubbles usually, if not always, start with some real economic displacement or event that goes some way to justify them. This makes the prescription "Act to prevent bubbles" difficult to put into practice.

Sometimes—one last concession—bubbles also serve a useful or even necessary function. Suppose that the Fed had acted promptly in the late 1990s to prevent the share-price bubble from inflating. As you recall, Greenspan spoke of the market's "irrational exuberance" as early as 1996, expressing a central-bankerly caution that he then cast aside. So suppose that he had acted on that view and raised interest rates to restore a sense of financial calm. Further suppose that share prices had not risen so far—in other words, that the cost of capital had not fallen, in effect, to zero, as it did.

A lot of money that was lost would not have been. A lot of bad businesses that failed in short order, at great waste of capital, would not have been started in the first place. Yet, on the other hand, some businesses would not have been started that did go on to succeed and to blaze the new-technology trail for other companies, new and incumbent. One cannot be certain, under these circumstances, that it would have been better to avoid the dot-com bubble.

But in economics, one can be certain of very little. Certainty is not an appropriate standard. That is why it is an evasion, as The Economist rightly argues, for Greenspan to say that bubbles are difficult to spot at the time. Whoever said that monetary policy was easy? Many of the things a central bank would like to know in setting interest rates cannot be known with certainty, or even with much accuracy, at the time. Monetary policy is a forecast-based undertaking, and everybody knows what economic forecasts are worth. The right standard is not certainty but intelligent management of risk. And bubbles, or suspected bubbles, do pose grave financial and economic risks.

Greenspan engineered a great escape from the recession that should have followed the dot-com crash. Were he to stay in charge, he might not be so lucky next time. And his policy of persistently low interest rates has surely helped to inflate American house prices to worrying levels in relation to both rents and wages; it has also played its part in encouraging an explosive increase in consumer borrowing (which has its counterpart in the country's balance-of-payments deficit and rapidly growing foreign debt).

To be sure, risks have to be set in context—but this works both ways, against the Greenspan approach as well as for it. In America's current case, the housing-bubble risk is mitigated by some factors and aggravated by others. An aggravating factor is the possibility, indeed the likelihood, that the currently enormous inflow of foreign capital will be interrupted at some not-too-distant point, provoking a fall in the dollar and obliging the Fed to raise interest rates as an anti-inflation measure.

High house prices, overstretched mortgage borrowers, and an impending rise in interest rates are an alarming combination. Against this is the mitigating factor that most mortgage borrowers have taken their loans at fixed rates, shifting the risk from households to financial institutions, which are better equipped to manage it. Finally, though, the house-price bubble (if that is what it is) lacks the redeeming virtues of a share-price bubble based partly on a genuine economic displacement: It is neither the counterpart, nor the enabler, of a surge in potentially profitable investment.

On balance, then, the Fed should be a lot more worried about the second bubble than it seems to be. Will the change of leadership make a difference? Probably not. Bernanke does have his own take on monetary policy: He seems to favor explicit inflation targets over Greenspan's tactical opacity ("If you think I spoke clearly, you must have misunderstood"). But this difference may amount to little in practice. The two appear to agree about asset prices: Deal with the consequences, if and when they happen. In that regard, the Greenspan era is not yet over.