Why "Hands-Off" Policy Really Isn't Hands-Off
I agree that the Greenspan-Bernanke policy is a damaging policy. My problem is with the presumption that this somehow represents laissez-faire or hands-off during the creation of the bubble. In fact, the bubble is just as much a case of intervention as the Fed's post-bubble actions.
This does not necessarily mean that interest rates are reduced during the bubble compared to before. Sometimes that is in fact the case, as we saw during the first 3 years of the housing bubble, but it is not always the case and it need not be the case. All that is needed is that the central bank holds interest rates lower than they otherwise would have been by increasing the money supply.
Under a free market monetary system, if for some reason people gain irrational exuberance about some asset class, than this would automatically raise interest rates. This would make it a lot more expensive to borrow for such investments, and also make it more profitable to buy bonds rather than that asset class, and so automatically prevent any significant bubbles.
The free market solution to bubbles is of course to abolish central banks and replace them with gold or possibly some other specie based currency that the market chooses. Short of that, however, a policy which more or less automatically raised interest rates whenever there were signs of asset price bubbles would actually be more neutral to the market then a policy which instead allowed money supply growth to accelerate. Such a policy, or a similar policy of targeting very low money supply growth, would imitate the market response and for that reason, constitute less intervention than the Greenspan-Bernanke policy of fueling asset price bubbles with a higher money supply.