Greenspan Throws Up His Hands
Alan Greenspan’s campaign to defend his legacy appears to be backfiring. On the heels of his Financial Times commentary comes a revealing interview with the former Fed chief in the Washington Post. Greenspan rues the fact that bad things happen when people don’t act rationally, but the most disturbing theme of the interview is that the Fed and other central bankers are powerless.
A few choice excerpts (our emphasis added):
“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.”
“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.”
“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.”
Paul Kedrosky thinks Greenspan is losing his mind.
Greenspan’s FT column drew a raft of critical responses such as this from A. Edward Gottesman, Gottesman Jones & Partners LLP:
The central banker’s job description is to “take away the punchbowl” before the party gets out of hand. Is a small sign of remorse too much to ask?
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