Greenspan Defends Himself
Former Federal Reserve chairman Alan Greenspan speaks out against critics who say he’s the cause of the housing bubble and financial crisis:
For much of his 18 years atop the world’s most-influential economic institution, Mr. Greenspan was lionized for the economy’s performance. Now, he notes, he’s being second-guessed for it.
“I was praised for things I didn’t do,” Mr. Greenspan said during one of three interviews at his sun-drenched office in downtown Washington, D.C. “I am now being blamed for things that I didn’t do.”
About the housing bubble he does admit to an error in his economic analysis:
At the time [2001-2003], 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. He pulls out a 1999 speech and shows, underlined in green marker, passages in which he warned of recurring but unpredictable patterns of overconfidence followed by investor panic. He does not share some foreign central bankers’ belief that their job is to defend against excessive asset-price inflation: No sensible policy, he maintains, could have prevented the housing bubble.
Cutting interest rates to 1% in 2003 played against Greenspan’s gut instinct:
He says rock-bottom interest rates actually went against his “19th century” aversion to easy money. “My inner soul didn’t feel comfortable,” he says. He justified the policy by noting that at the time, inflation was falling persistently and the risk of deflation — though small — seemed real, despite his prior assumptions that it was impossible with a dollar unlinked to gold.
To prevent deflation, the Fed spurred growth by keeping interest rates low. At the time, he notes, the only dissenting votes on the Fed policy committee were those who wanted to set rates even lower. The Fed, he said, initially raised rates gradually to give businesses and investors time to prepare. In 2004 and 2005, it raised rates faster than private economists expected.
About talk of greater regulation of financial markets Greenspans warns of the trade-offs:
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.
His Legacy Tarnished, Greenspan Goes on Defensive”
