Greenspan missed subprime dangers
September 14, 2007
Alan Greenspan denied that the interest-rate cuts that he oversaw are to blame for the current
Former Federal Reserve Chairman Alan Greenspan acknowledges that he failed to see early on that an explosion of mortgages
to people with questionable credit histories could pose a danger to the economy.
In an upcoming interview, Mr. Greenspan said he was aware of "subprime" lending practices, in which home buyers got very
low initial rates only to see them jacked up later, causing severe payment shock. But he said he didn't initially realize
the harm they could do.
"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," he said. "I really didn't get it until very late in 2005 and 2006."
A meltdown in the subprime mortgage market has rocked Wall Street. Foreclosures and late payments have soared, and lenders
have gone out of business. Nervous financial institutions tightened credit standards, making it harder for even more creditworthy
borrowers to get financing. This has increased chances that the economy might slide into a recession.
Mr. Greenspan, who ran the central bank for more than 18 years — the second-longest-serving chairman in history —
left in 2006. His successor, Ben S. Bernanke, has had to deal with a credit and financial crisis stemming from the subprime
When he was at the helm, Mr. Greenspan maintained that there was little the Fed could do about the subprime situation.
One of the Fed's governors, however, had raised a red flag about questionable lending practices.
"Well, it was nothing to look into particularly because we knew there was a number of such practices going on, but it's
very difficult for banking regulators to deal with that," Mr. Greenspan said in a CBS "60 Minutes" interview to be broadcast
An excerpt of the interview was released yesterday.
Some blamed Mr. Greenspan's interest-rate policies for feeding the housing frenzy. Sales had hit record highs, and house
prices galloped from 2001 to 2005. Then the market fell into a deep slump.
The Greenspan Fed from early 2001 to the summer of 2003 had slashed interest rates to their lowest level in decades. It
was done to rescue the economy from the blows of the bursting of the stock-market bubble, the 2001 recession, the terror attacks
and a wave of accounting scandals that shook Wall Street.
Critics say the Fed kept rates too low for too long, encouraging a Wild West mentality in housing.
Mr. Greenspan, however, defended the institution's actions.
"They are mistaken," he said of the critics. "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."
Meanwhile, some think Mr. Greenspan would have acted more aggressively than Mr. Bernanke has in dealing with the current
"I'm not sure that's true," Mr. Greenspan said. "I think [Mr. Bernanke] is doing an excellent job."
Mr. Greenspan has written a book, looking back on his life and his days as Fed chief. It will be released Monday.