‘This was an Accident Waiting to Happen’: Responding to Critics Charging the Fed for the Housing Bubble and Subprime Mortgage Mess
NEW YORK, Sept. 16 /PRNewswire/ — Former Federal Reserve Chairman Alan Greenspan responds to critics who charge that the Fed contributed to the housing bubble and subprime mortgage mess by keeping interest rates low for so long, “This particular problem was an accident waiting to happen. The euphoria that existed in the expansion of the housing-market bubble induced investors around the world who’d had a huge buildup in liquidity-largely because of the lower real long-term interest rates that occurred as a consequence of the end of the cold war-to invest in something with a higher rate of return. And, lo and behold, the subprime mortgage market provided it,” he tells Newsweek in the September 24 cover “The World According to Greenspan” (on newsstands Monday, September 17).
In a candid conversation, Newsweek Editor Jon Meacham and Columnist Daniel Gross ask if a certain degree of instability is needed in order to grow. Greenspan says, “It appears as though we need a certain degree of turbulence in the financial system to create the stability in the private system. A B-2 bomber is run almost wholly on computerized adjustments. Hundreds of thousands, maybe millions of adjustments that are going on all the time keeps the plane stable. That’s not actually a bad analogy to the turbulence in the economy. In one sense it’s benevolent turbulence.”
Greenspan tells Newsweek, on the question everyone wants to know, if he thinks we are in a recession or headed for one by the end of the year, “Well, we’re not in one now. That we’re not headed for one is a forecast which has yet to unfold one way or another.”
With the next presidential election imminent, Newsweek asks who he would want to win: “Is one of the choices leaving the office open?” Greenspan says. When asked about his view on Hillary Clinton for president he says, “Very smart. She is probably everything that everybody says about her. She wouldn’t be a bad president, but she won’t attack the issues which really require coming to grips with during the campaign. The absolute blindness of candidates to the obvious issue of Medicare’s problems is just truly discouraging to me,” Greenspan says.
Greenspan considers himself the luckiest economist in the world. “I was very fortunate,” he tells Newsweek of his tenure, which lasted from August 1987 to January 2006. “I emerged on the scene at the beginning of this extraordinary half-generation. And my tenure ended as events began to change. At the Federal Reserve, we created policies that took full advantage of the way the global economy was working, which enabled us to gain what has really been a remarkable rise in American standards of living.”
On his legacy: “I’d like very much for people to say, ‘Well, he caused all of that.’ But I don’t think the evidence holds up very well for that hypothesis. What I did was create essentially a risk-management-based procedure to implement monetary policy.”
Greenspan also says that if someone told him in 1987, when he became Fed chairman, that it would be possible to have virtually uninterrupted economic growth for nearly twenty years, it would have been a case of “psychiatric inadequacy.” He continued: “I do realize how extraordinary, how unusual, this period has been. The very nature of its discontinuity from history is what forced me to reach beyond the usual economic variables to seek an explanation of what it’s all about. And as you know, I concluded that it was the result of a seminal geopolitical event, the end of the cold war.”
He continues, “On one side of the Iron Curtain were essentially centrally planned collectivist societies based on the principal that collective activity is what produces wealth and therefore there are no individual rights to property. On the other side were capitalist societies built around the market system, with free trade and individual-property rights. The classic case was East Germany versus West Germany, which were two economies coming from the same history, culture and language… The conventional wisdom was that East Germany’s economy was three fourths the size of West Germany’s, and that the Soviet Union, while having major shortfalls, was a formidable economic power. Then the Berlin Wall came down, and the economic ruin behind the Iron Curtain was utterly unexpected and unimaginable.”
Newsweek asked Greenspan about the concern many Americans have over China’s rise. “I am not, as many people are, concerned about China becoming a threat militarily. In my book, I’m essentially forecasting that what happened to the communist parties of Europe is likely what will happen to the Chinese communist party… They are going to be a formidable economic power, which I think is all to the good,” says Greenspan.
(Read complete interview, book excerpt and article at www.Newsweek.com)
http://www.msnbc.msn.com/id/20803168/site/newsweek/ – The Greenspan Gospel
http://www.msnbc.msn.com/id/20803170/site/newsweek/ – The Oracle Reveals All (Interview)
SOURCE Newsweek
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