Originally published in the WSJ and edited by Jeffrey Taylor for clarity and content
Alan Greenspan was lionized for the economy’s performance for much of his 18 years as chairman of the Fed, but now, he notes, he’s being second-guessed for it. At 82, he wants to set the record straight before the ink dries on the first draft of the current financial crisis’ history.
Hailed three years ago as “the greatest central banker who ever lived,” the retired chairman of the Federal Reserve now is being criticized for his management of the U.S. economy before he retired in 2006.
The Fed’s low rates and laissez-faire regulatory oversight during his final years are widely blamed for sowing the seeds of today’s financial crisis — one that began in the U.S. housing market and is now battering banks, stock markets, borrowers and consumers around the world.
Former Fed chief Alan Greenspan calls some of the criticisms of his tenure ‘quite unfair.’”I was praised for things I didn’t do,” Mr. Greenspan said. I am now being blamed for things that I didn’t do.”
The scrutiny of Mr. Greenspan’s record has taken on urgency now that the Bush administration and congressional Democrats are skirmishing over how to overhaul U.S. financial regulation.
If Mr. Greenspan’s critics prevail, then financial companies will likely face tighter oversight and less freedom in the products they offer. If Mr. Greenspan’s views carry the day, the trend toward self-policing will continue.
A repudiation of Mr. Greenspan’s monetary policies could tempt the Fed to raise interest rates relatively quickly after the current crisis passes, and even attempt to deflate future bubbles with higher interest rates.
No stranger to controversy, he easily brushes off the comments of longtime antagonists.
The criticisms that get under his skin are those from friends and former colleagues, many of them respected economists who backed his policies at the time but now say, in hindsight, that the calls were wrong. “I do take it seriously if my peers think I have misstated the facts,” he says. “But where’s the evidence? Too many people make accusations by assertion. I think it’s improper.”
The prevailing view among critics faults Mr. Greenspan on two main counts.
First, they say, his Fed lowered rates too much from 2001 to 2003 to cushion the economy from the bursting dotcom bubble. Then it took too long to raise them again. Low rates fueled mortgage borrowing, driving home prices to unsustainable heights.
Second, they say, the Fed was lax in its regulatory role. The central bank failed to press for stiffer rules for underwriting mortgages to people who ultimately couldn’t afford them. Also, the Fed failed to anticipate banks’ exposure to risky home buyers, leaving them with too little capital to absorb the eventual losses on those mortgages.
At the time, Mr. Greenspan expected his policy to boost housing because the rest of the economy was relatively unresponsive to lower interest rates. Based on decades of his own research, he believed a buoyant housing market would spur consumers to borrow against home values and spend more. This would not produce a housing bubble, he predicted, because it was difficult to speculate in homes and the memory of the 2000 tech-stock bust remained fresh.
Mr. Greenspan now admits he was wrong about the improbability of a housing bubble. Yet he has long maintained that bubbles are an unavoidable feature of a dynamic economy.
In Mr. Greenspan’s view, if the Fed’s policies were to blame, the housing bubble would have been mostly limited to the U.S. Yet, he argued, many other countries had housing bubbles, too. A better culprit, he suggested, was the glut of savings globally. Savers were competing to make loans, keeping long-term interest rates low in many countries and fueling housing demand.
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Inside the Brain of Alan Greenspan
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Decision making:
“Monetary policy is process based on probabilities. I don’t remember a case when the process by which the decision making at the Federal Reserve failed. Events often did not proceed as we anticipated, but that resulted from a lack of foresight, not from a flawed decision-making process.”
Low interest rates:
“I’m an old 19th-century liberal who is uncomfortable with low interest rates. My inner soul didn’t feel comfortable.”
Regulation:
“Omniscience is not given to us. There is no way to predict how innovative markets will develop. All you can do is set a general strategy. The choice is between a lightly or tightly regulated economy. The former is highly competitive, innovative, and dynamic — but periodically visited by wrenching crises. The latter is more stable, but slower growing.”
The housing bubble:
“I’m surprised it went as far as it did. I am having the same problem now with surging prices of oil and food. Are they bubbles?”
The role of adjustable-rate mortgages in the housing crisis:
“Adjustable-rate mortgages were the cheapest way they could finance home purchases. But if they were not available, home purchases arguably would have been financed with fixed-rate mortgages. There’s no evidence of which I’m aware that says that price would be importantly less if adjustable-rate mortgages had been less.”
Failure of market self-regulation:
“There were far more failures here than I expected. I’ve been chagrined at how badly some of the judgments of very sophisticated investors have been with respect to risks…It’s all human psychology with which we’re dealing, not institutions. The argument, therefore, is not to discard counterparty surveillance, but, essentially, to patch it back together.”
His early disbelief at the surge in subprime lending:
“When in 2005 I first ran across the sharp spike in subprime-mortgage originations estimated by a private vendor, which was later confirmed, I said, “This makes no sense. Markets don’t move that fast.”
