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Greenspan Examines Federal Reserve, Mortgage Crunch

September 18, 2007 at 6:40 PM EST
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GWEN IFILL: Now, the first of a two-part conversation with former Federal Reserve Chairman Alan Greenspan. During his 18-plus years at the Fed, Greenspan worked with four presidents, faced financial crises in America and abroad, and made some controversial decisions about economic policy. His new book is “The Age of Turbulence.” Jim Lehrer spoke with him late last week.

JIM LEHRER: Mr. Chairman, welcome.

ALAN GREENSPAN, Former Federal Reserve Chairman: Thank you.

JIM LEHRER: “The Age of Turbulence,” what does that mean?

ALAN GREENSPAN: It’s a title that I came upon only late in the book after I had gone through a fairly considerable amount of history of my tenure and various different activities. And then, as I began to discuss what has been going on in the 21st century, with the extraordinary changes in globalization, international economics, and, very importantly, the end of the Cold War, and what this type of environment is, is a turbulent financial environment, which ironically is probably, as a consequence of the turbulence, creating a more productive, stable, economic and employment situation.

JIM LEHRER: Well, speaking of turbulence, of course, we’ve got this thing going on, the subprime mortgage turbulence or crisis, whatever you want to call it. Looking back, do you think there is something that could have been done on your watch as chairman of the Fed that could have prevented this from happening?

ALAN GREENSPAN: I don’t think so. First of all, the problem that we’re dealing with now is an aspect of the — it’s one of the — it’s a result of human nature, basically the innate characteristics of human nature, in the sense that people, after a period of exuberance…

JIM LEHRER: There’s a magic word for you, exuberance.

ALAN GREENSPAN: I like that word. I think I’ll use it.

JIM LEHRER: OK.

ALAN GREENSPAN: But the problem is that we’ve had a bubble in housing, and the bubble in housing essentially has roots, as I point out in the book, to the end of the cold war, leaving aside all the economics that are involved.

But the consequence, with respect to the end of the Cold War, was a huge change in the geopolitical structure of the world, where a billion people who have been well-educated, extremely low paid, but behind the Iron Curtain or in centrally planned, quasi-centrally planned societies, started as a consequence of the result of the decline of the — the takedown of the Berlin Wall, which showed an extraordinary amount of economic rune behind the Iron Curtain. And very quietly, with no fanfare, vast amounts of people abandoned central planning.

And for example, in China, there was a huge move of people from the provinces down into the special enterprise zones in the Pearl River Delta, which created a huge economic boom, which we’re all aware of, and those economics essentially, as I describe in some detail in this book, created a very major decline in long-term interest rates around the world. In every major country, housing prices went up very sharply.

JIM LEHRER: Because interest rates were down, it was easier to buy a house?

ALAN GREENSPAN: Absolutely.

JIM LEHRER: And the market boomed.

ALAN GREENSPAN: And the market boomed.

JIM LEHRER: It boomed too much?

ALAN GREENSPAN: Well, yes, I think it did boom too much.

Responsibility for the current Fed

Alan Greenspan
Former Federal Reserve Chairman
What I'm increasingly beginning to conclude is, when you get bubbles like this, there is no way of diffusing them until the speculative fever breaks on its own.

JIM LEHRER: But you don't feel any responsibility for keeping interest rates low?

ALAN GREENSPAN: Well, let me tell you. We had no choice. I mean, we're the vaunted Federal Reserve, but this global force was suppressing us. We actually tried in 2004 to get mortgage interest rates up and to put some sort of clamp on the extent of the housing boom, and we failed, because usually when we move short-term interest rates up, which is what the Federal Reserve does, long-term rates go with it. It didn't this time. We tried the same thing in 2005...

JIM LEHRER: Didn't happen?

ALAN GREENSPAN: Didn't happen. Had we done it back in 2002, there's no doubt in my mind nothing would have happened. And as a consequence, we and, in fact, every other central bank could not confront this issue.

And what I'm increasingly beginning to conclude is, when you get bubbles like this, there is no way of diffusing them until the speculative fever breaks on its own. We tried numbers of things, and other people tried numbers of things.

But what is different about the United States is, when our bubble burst, housing prices started down. Our actual rise in prices is probably a little below average around the world. But we, as a consequence of having a major thrust in trying to increase homeownership in this country, developed properly, in my view, subprime mortgages so a lot of people who would not otherwise be able to own a home were able to own a home.

JIM LEHRER: But then their interest rates went up over a period of time. That's when they got hurt, right?

ALAN GREENSPAN: Well, the real problem began because a very significant proportion of those loans were on terms which shouldn't have been made. In many cases, I think it was fraud and that, I say in the book, as you know, the only area where I think more regulation is required in this country is addressing fraud, because fraud is destructive of markets, but more importantly it's destructive of families.

Republican motivations

Alan Greenspan
Former Federal Reserve Chairman
I have the underlying political philosophy because I believe that markets work and that markets contribute a great deal to civilization.

JIM LEHRER: A little bit more about your job as chairman of the Fed, which you've written about extensively in the book. You say very clearly and way out front that you are a Republican. You've been a Republican since -- well, for how long? I mean, almost since you started knowing about politics, you've been a Republican.

ALAN GREENSPAN: Since I thought about politics...

JIM LEHRER: Thought about politics.

ALAN GREENSPAN: ... I've been a combination of libertarian-Republican all along.

JIM LEHRER: While you were chairman of the board, was there anything that you, looking back on it now, that you feel you did because you're a Republican?

ALAN GREENSPAN: Well, I have the underlying political philosophy because I believe that markets work and that markets contribute a great deal to civilization. So it's not as though I have an ideology and then I apply it. I have the ideology because I believe that it is the best way of coming at the world and what type of policy.

JIM LEHRER: What is the proper relationship, what should be the proper relationship between a chairman of the Fed and a president of the United States?

ALAN GREENSPAN: Well, first of all, the Federal Reserve is an independent agency, and that means, basically, that there is no other agency of government which can overrule actions that we take. So long as that is in place and there is no evidence that the administration or the Congress or anybody else is requesting that we do things other than what we think is the appropriate thing, then what the relationships are don't, frankly, matter. And I've had very good relationships with presidents.

Senior Bush's re-election loss

Alan Greenspan
Former Federal Reserve Chairman
The models suggested that George H.W. Bush would be re-elected, given the nature of what the economic system was doing at that time, so I didn't think that, so far as economics was concerned, he had anything really seriously to worry about.

JIM LEHRER: Well, I know that you mention in the book -- and everybody knew about it at the time -- that President George H.W. Bush blamed you, partly at least, for his re-election loss.

ALAN GREENSPAN: I think he said -- I think he said "fully."

JIM LEHRER: I think fully. You're right. I'm just trying to help you out there a little bit. What is it you did that upset him so?

ALAN GREENSPAN: We started to ease interest rates after the credit crunch in the late-'80s, and he felt that we were not lowering them sufficiently rapidly to re-galvanize the economy. The Federal Reserve essentially, in a unanimous voice, disagreed with him.

JIM LEHRER: Were you aware of the fact that this could hurt George H.W. Bush's re-election? Was that a factor at all?

ALAN GREENSPAN: Well, not really, for a different reason, because the economy was picking up and, indeed, there are, as you're probably aware -- I'm sure, when elections come around, there are a bunch of models which endeavor to try to figure out what the vote should be, given how the economy is doing and the like. And they've been very successful.

The models suggested that George H.W. Bush would be re-elected, given the nature of what the economic system was doing at that time, so I didn't think that, so far as economics was concerned, he had anything really seriously to worry about.

The case for tax cuts

Alan Greenspan
Former Federal Reserve Chairman
I thought the only sensible thing to do at that point is to try to bring the surplus down to zero, at the point when debt disappeared, so we would not be required to build up any assets.

JIM LEHRER: The other allegation that was made by some on the other side was that you did a favor to his son, President George W. Bush, by semi-endorsing his tax cuts. What's the story there?

ALAN GREENSPAN: Well, I tried to explain it in some detail.

JIM LEHRER: I know.

ALAN GREENSPAN: I had always been very much against federal budget deficits as a corrosive force in finance, and I never really confronted the issue of, what would happen if we ran out of debt, meaning if we had a long period of federal surpluses?

And, indeed, starting in 2000-2001, all of the experts, including those at the Federal Reserve said, because of a structural change in productivity, we were now confronted with a rapid and continuing rise in a surplus which would, by 2006, virtually effectively eliminate outstanding debt.

JIM LEHRER: The deficit.

ALAN GREENSPAN: The problem would be is that, if that occurred in 2006, the surplus would have to be employed to purchase private assets. And having observed the way Richard Nixon and Lyndon Johnson behaved, the thought of having the government in control of vast claims on the private sector, including equities, I thought was a very dangerous possibility.

And so I thought the only sensible thing to do at that point is to try to bring the surplus down to zero, at the point when debt disappeared, so we would not be required to build up any assets. And that could have been accomplished with what George W. Bush's tax plan essentially was suggesting, but also what the Democratic leadership's tax plan could be.

And I essentially said in the book, which is true, that I would have given the same testimony if Gore were elected president as I did at that particular point. And there was a great deal of concern that I had opened up Pandora's Box or something like that, which I thought was a little cynical, because I was granted all this huge power, and I said, "Now, wait a second. Nobody listens to me on the budget deficit, or on PAYGO, or other technical issues which constrain the budget. All of a sudden, I become all-powerful."

But most importantly, nobody read my testimony in full, because of I'd had all sorts of caveats about if the tax cut -- if the deficit -- I'm sorry, if the surplus didn't continue, there would be a trigger it to change the law. So I thought that was a rather...

JIM LEHRER: Not guilty, in other words. Not guilty plea, sir?

ALAN GREENSPAN: I'm not guilty.

GWEN IFILL: Tomorrow night, in part two of Jim's conversation, Alan Greenspan shares his views on Presidents Nixon and Clinton, and explains why he didn't become, of all things, a jazz musician.