Greenspan Says Didn’t See Subprime Storm Brewing (Sep 2007)

federal-reserve

Source: Reuters – Greenspan says didn’t see subprime storm brewing

Notable excerpts:

Former Federal Reserve Chairman Alan Greenspan said he was late to see the storm gathering around U.S. mortgage lending practices and commended his successor Ben Bernanke’s handling of the crisis, saying he would likely be responding in a similar fashion.

Greenspan, who stepped down from the helm of the U.S. central bank in January 2006, said that as Fed chief he knew about questionable lending practices that were leaving subprime borrowers with adjustable rate loans vulnerable to harm from rising interest rates, but did not recognize those loans would trigger broader problems until fairly recently, CBS said.

“While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,” Greenspan said. “I really didn’t get it until very late in 2005 and 2006.”

Greenspan, 81, has received credit for leading the economy to its longest-ever expansion in the 1990s and many economists have praised his handling of a sequence of crises.

Indeed, some have hailed him as the greatest central banker in U.S. history.

However, others criticize Greenspan for sowing the seeds of successive asset bubbles, first in U.S. stock markets and later in housing. He has also come under fire for suggesting during his Fed tenure that adjustable rate mortgages could be a cost-saving financing option for many borrowers, just shortly before the Fed embarked on a long push to move rates higher.

In the interview, Greenspan defended the Fed’s decision under his leadership to hold interest rates at or near lows not seen in four decades between December 2001 and June 2004, a period in which the economy was enjoying only a lackluster recovery from recession.

Many critics charge that current subprime problems and the prolonged housing slump are the result of the fizzling of a residential real estate frenzy fueled by this prolonged period of cheap borrowing costs.

But Greenspan said those critics fail to grasp that low rates were necessary to breathe life into an economy that was reeling from multiple shocks.

“They are mistaken,” he said. “It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low.”

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