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Excerpts of an Interview With Former Federal Reserve Chairman Alan Greenspan

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Friday, March 21, 2008

On the current economic crisis:

"Whenever you have a crisis like this, it's always important to evaluate why it happened and, if appropriate, ascribe blame to institutions and people, because if you don't get it right you won't get the fix right."

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On the decision to keep the federal funds rate at 1 percent from mid-2003 to mid-2004:

"There was a real serious concern about deflation. If you look at the notes of the Open Market Committee, the pressures were to go lower than 1 percent. There were no dissents. The only dissents were that we should go lower. People don't remember that period. [People thought there was] a threat to American stability because it looked as though we were replicating much of what Japan had done when it had fallen into a corrosive deflation.

"Our forecast at the time said the chances were low, but the consequences to the country would have been so great that taking out insurance was by far the most sensible policy. I still believe that today."

On adjustable-rate mortgages:

"I was convinced at the time and am convinced now that the level of adjustable-rate mortgages . . . wasn't a serious problem for attracting people into the market who then got caught [by higher rates]. People who had taken out loans in June 2003 at adjustable rates could have converted those to long-term fixed-rate mortgages at a profit over the next 18 months. And people didn't. And the reason they didn't. . . . Put it this way: They should have. I don't know frankly why they didn't. Long-term rates were low. Refinancing would have been a good decision."

Greenspan blames financial institutions for the explosion of subprime mortgages, not homeowners. Firms known as "securitizers" bundled large numbers of loans together so they could be sold.

"The very sophisticated financial community basically decided that this was a steal. They put very significant pressure on the securitizers to produce more paper. I was aware of it at the time. Then the securitizers began to pressure the lenders and underwriting standards became egregious. It wasn't that the Federal Reserve wasn't aware of the problem. What we didn't realize was the order of magnitude of the subprime lending, which started as a niche with no macroeconomic implications to something that became excessive, a huge part of the market that . . . was sold around the world."

On the power of the Fed:

"Everyone agrees that it is long-term interest rates and mortgages that ultimately determine the demand for homes and hence the price. What became clear in the early part of this decade is that central banks, not only the Fed, . . . began to lose control over long-term interest rates. That was a major issue in 2004. The Federal Reserve started to raise short-term rates very significantly and found that instead of long-term rates rising with them in unison, it failed . . . I call it the conundrum. What the conundrum was was evidence that long-term interest rates were being dominated by long-term forces."


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