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| Former Federal Reserve Chairman Alan Greenspan talks to 60 Minutes correspondent Lesley Stahl. (CBS) |
Former Federal Reserve Chairman Alan Greenspanadmits he "didn't really get it" that the sub-prime lending trend was significant enough to hurt the economy until very late 2005, but still defends his lowering of interest rates from 2001 until 2004 that critics say caused the crisis in the first place.
Greenspan, who led the U.S. Federal Reserve Bank through 18 years and four presidents, speaks to 60 Minutes correspondent Lesley Stahl in his first major interview this Sunday, Sep. 16, at 7 p.m. ET/PT.
Alan Greenspan's memoirs The Age of Turbulence, will be published on Monday.
Greenspan says he knew about the questionable sub-prime lending tactics that gave loans to homebuyers and investors with low adjustable interest rates that could rise precipitously, but not the severe economic consequences they posed. "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 tells Stahl. "I really didn't get it until very late in 2005 and 2006."
Even though one of the Federal Reserve governors raised a red flag on those lending practices, Greenspan says there was little he could do. "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," says Greenspan.
Several of Greenspan's former Federal Reserve governors have since said that Greenspan's policy of lowering interest rates for three consecutive years early in the decade was wrong because it opened the door for the subprime lenders. They think he kept rates too low for too long. "They are mistaken," Greenspan tells Stahl. "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," he says.
In a speechat the recent Federal Reserve Jackson Hole symposium, John Taylor, an economist at Stanford University, suggested that the Fed Funds rate should never have been taken lower than 1.75 per cent in 2001, when the US economy began to emerge from recession, since it encouraged markets to believe that the Fed had de-emphasised its perennial fight against inflation because of fears of deflation.
"A higher funds path would have avoided much of the housing boom," Taylor said. "The reversal of the boom and thereby the resulting market turmoil would not have been as sharp."
Some believe today's market slide -- U.S. stocks have lost significant ground over the past few months -- could have been slowed had the current Federal Reserve Chairman Ben Bernanke lowered interest rates like Greenspan did early in the decade.
Would he act as dramatically and quickly now as he did then if he were the current chairman as some believe? "I'm not sure that's true," says Greenspan. "We were dealing in an environment back there where inflation was easing. We could have acted without the fear of stoking inflationary pressures. You can't do that anymore. ... I'm not certain I would have done anything different [if he was the chairman today]," he tells Stahl. "I think [Bernanke] is doing an excellent job."
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