Greenspan Mulls Roots of Crisis He Didn't Foresee

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Greenspan Interview (This photo taken Oct. 18, 2013 shows economist Alan Greenspan in his office in Washington. For 18½ years a
J. Scott Applewhite/APFormer Federal Reserve Chairman Alan Greenspan.
By MARTIN CRUTSINGER

WASHINGTON -- For 18½ years as Federal Reserve chairman, he was rhapsodized for helping drive a robust U.S. economy. Yet in the years after he stepped down in 2006, he was engulfed by accusations that he helped cause the 2008 financial crisis -- the worst since the 1930's.

Now, Alan Greenspan has struck back at any notion that he -- or anyone -- could have known how or when to defuse the threats that triggered the crisis. He argues in a new book, "The Map and the Territory," that traditional economic forecasting is no match for the irrational risk-taking that can inflate catastrophic price bubbles in assets like homes or tech stocks.

In an interview Sunday with The Associated Press, Greenspan reflected on his book, his Fed tenure and the risks that still endanger the financial system. Relaxed and looking fit at 87, he spoke for an hour in the sunroom of his house overlooking a wooded hillside of Northwest Washington. It's a home he shares with his wife, Andrea Mitchell, the NBC News anchor and chief foreign affairs correspondent.

Surrounded by books of presidential and financial history, Greenspan acknowledged some errors of judgment as Fed chair. But he said he saw no reason to downgrade his own assessment of his tenure.

"Our record was fairly good," he said.

He expressed relief at having finally ended an intense 18 months of work on his book. Now, it's on to talk-show chats with the likes of Jon Stewart and Charlie Rose.

Greenspan offers high praise for Janet Yellen, President Barack Obama's choice to lead the Fed starting in January. As a member of the Fed's board in Washington, Greenspan recalled, Yellen sometimes helped him better grasp "what this academic is saying."

He says he still plays tennis regularly -- singles as well as doubles. And he seems as much a man of the 21st century as he is of the 20th: In search of his iPhone, he twice asked a staffer where it might be.

Reaching back nostalgically to the Republican administration of Gerald Ford, when he led the president's Council of Economic Advisers, Greenspan remembers a different Washington. He recalls it as a time when political leaders dared to trust their opponents and collaborated to reach common goals.

It didn't hurt, Greenspan said, that the Democratic speaker of the House, Thomas P. "Tip" O'Neill, would drop by the West Wing of the White House some nights "and have a bourbon with Jerry."

Here are excerpts of the Greenspan interview, edited for length and clarity:

Q: You write that you were shaken by the 2008 financial crisis because of the failure of one of the pillars of a stable financial market -- "rational financial risk management." What did you discover in your research for the book about this issue?

A: Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.

Q: When you published your last book, "Age of Turbulence," in 2007, you were being hailed as a "maestro" of the global economy. Then the worst financial crisis since the 1930s erupted. Your policies as Fed chair were blamed for sowing the seeds for that crisis. How did the criticism affect you personally?

A: I've been around long enough to know that a good deal of the praise heaped on me I had nothing to do with. The only thing I did object to was the fact that where the criticism was actually wrong. Did it bother me? Of course it bothered me. But I've been around long enough to have ups and down. So you get over it.

Q: With the knowledge you gained from the financial crisis, has it changed your own assessment of how well you performed as Fed chairman?

A: The real question is, should I have done something different? And the answer to that question is no. Did we make mistakes?
You bet we made mistakes. But I thought our record was fairly good. Remember, we stepped in, probably at just the right time after Oct. 19, 1987, when the market went down 22 percent. It was pretty rocky for awhile, but I thought we maneuvered that better than I expected we would be able to do. There were a lot of things of that nature where I thought we did well. And there were other things we didn't do well.

Q: A lot of criticism centers around the failure of the Fed and other regulators to deal with the explosion of subprime mortgages, which were packaged into securities that then turned bad and were at the center of the troubles. Should the Fed have handled subprime mortgage regulation differently?

A: The problem is that we didn't know about it. It was a big surprise to me how big the subprime market had gotten by 2005. I was told very little of the problems were under Fed supervision. But still, if we had seen something big, we would have made a big fuss about it. But we didn't. We were wrong. Could we have caught it? I don't know.

Q: You're not a big fan of the Dodd-Frank Act (the 2010 financial regulation law that aims to prevent another crisis). Why not?

A: It was written politically, in a way that the regulators get the responsibility to solve the problem. There is a whole list of things the act wants done, and it specifies how individual regulators are going to solve the problems. Regulators are now required to do vastly more and to square it with other agencies.

Q: You got to know Larry Summers during his eight years at the Treasury Department during the Clinton administration, and you also worked with Janet Yellen when she was a member of the Fed board. Can you talk about both of them? (Summers and Yellen were rivals for the Fed chairmanship.)

A: The one thing about Larry is that we had breakfasts a couple of times a week for years. And never did a word get out. Those were important meetings. You get a certain trust for somebody. I know Larry's shirts stick out the back of his belt. Who cares? The guy is very smart, and he is unquestionably qualified for most any job you can think of. But then so is Janet. There were times when I came to her and I said, 'I don't understand what this academic is saying.' And she would explain it to me. That is a valuable resource. She is very sharp.

Q: On a more personal level, what books are you reading that you would recommend?

A: "Lords of Finance" is a very excellent book. He (Liaquat Ahamed, author of the Pulitzer Prize-winning history of central bankers) is going to be my moderator here next Tuesday. That book is an extraordinary book. I read the book on Coolidge (a biography of President Calvin Coolidge by Amity Shlaes) which I found fascinating because so little is known about him.

Q: Do you admire Coolidge?

A: Yes. I always have. He had his problems. It is a very interesting period of American history which I don't fully understand.

Q: Any other books you would recommend?

A: "The Battle of Bretton Woods" (Benn Steil's history of the 1944 international conference in New Hampshire that helped shape modern global finance) is a book I read recently, which is excellent. What those three books have in common is they provide a type of detail which I was never aware of. I know a great deal about history, but I was quite surprised.

Q: You're famous for your love of delving into the minute detail of economic statistics to help track the economy. One of your favorite statistics has been railroad boxcar loadings of autos and other manufactured goods. Are you still following that type of information?

A: Let me put it this way: When [the federal government] stopped publishing data a couple of weeks ago, one thing I had to tell what was going on with the economy was car loadings.

Q: Should the Fed start reducing its $85 billion a month in bond purchases?

A: I've tried to stay away from specific comments on Fed policy, for one good reason. Paul Volcker (his predecessor as Fed chairman) was very thoughtful. He never commented on Fed policy. I don't comment. They have got enough problems. Somebody harking over their shoulders isn't a good idea.

Q: What advice would you give Yellen, who has served the Fed as a board member, president of the San Francisco regional bank and since 2010 as vice chair?

A: I had a learning curve on a lot of different aspects of how the Fed operates. Janet clearly doesn't need that. Don Kohn (a longtime Fed staffer and vice chairman) mentored me through the early stages.

Q: The size of the Federal Reserve's balance sheet stands at a record $3.7 trillion, reflecting all the Treasurys and mortgage-backed securities the Fed has bought to push long-term interest rates down. You have expressed concerns about this size, which is more than four times where the balance sheet stood before the start of the financial crisis. What are your worries?

A: My basic concern is that we have to rein this thing in well before the demand for funds picks up and makes it very difficult to rein in. [Inflation] is not immediate. It is down the road. But historically, there are no cases where central banks blow up their balance sheets or where countries print money which doesn't hit [with higher inflation].

Q: You write that our highest priority should be to fix our broken political system. How?

A: Unless you are willing to compromise, society cannot live together. What is happening now is an increasing proportion of positions are getting beyond the point where the system can effectively hold together. I am concerned about it. It's not long ago when a Howard Baker and Bob Dole and Daniel Patrick Moynihan and Lloyd Bentsen spoke to each other. In the Ford administration, Jerry Ford used to be at Tip O'Neill -- toe to toe, bang, bang -- and then Tip would come over to the West Wing at 6 o'clock and have a bourbon with Jerry. That's what I mean that the system is broken. We have got to find a way back to the comity that we had not that long ago.



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JEA Architects

Because you can talk in front of people will ease, write books and constantly claim you are right, does not mean that you are correct and have any substance. Greenspan is an example of this.

October 22 2013 at 11:51 AM Report abuse rate up rate down Reply
frank1946

Homebuilders and Securities Lawyers.

Extreme DANGER.

Barney and Chris still Laughing !

Alan writes a Book.

October 22 2013 at 7:09 AM Report abuse +2 rate up rate down Reply
DDJoanMFountain

I'm not going to sit here and edit this much.
Around 1901 my grate grand Pa lost his shirt in a stock pick, anyway;
The poor did not notice, 2008 , at lest they didn't notice it that much. Then only noticed that they were still poor - that is the only reality they knew, - So pursue happiness,- and it would be nice if you all keep coming up with new toys for the children. - gee It's ok for you to pursue happiness, that helps the economy go. Pursue happiness, - know you - We work to work on our hobbies and those hobbies become our company because working on our hobbies is like practicing - and that is nice.
Hint Hint,
He wants everyone to invest in their safe federal saving accounts that insure up to a hundred thousand dollars again. Low interest rates on your returns slows down the economy a little. It would be nice if they said how much per percentage of our income they need you to save.
what was 2008 all about;
Maybe Instead of waiting for the reports to come out to know what to do with their money - when you raised the interest rate folks pulls a hunk of money out of the stock market. That slowed down our economy, maybe to much sometimes. Then those that need to take a tax write off for their loses do to folks pulling a hung of their money out, sold off and that looked like a crash, then it was time for tax returns, tax returns were release and when it was ok, reinvested and that looks like the stock market was coming back strong, causing inflation or two much growth to fast. so the prosperity caused a form of what is coined Dutch disease. All through this folks will be buying into stock positions hopefully a better one they think.

October 22 2013 at 6:30 AM Report abuse rate up rate down Reply
wizeanne

What a crock of bull excrement! After nearly a 100 years of the private Federal Reserve Bank sters AND the Federal Reserve's shareholder banks...who are the SAME banks, We The People bailed out, it is way past time to pass the legislation to "Audit the Federal Reserve!" Americans want to know WHO and how many TRILLIONS of OUR tax money went, to all the domestic AND "FOREIGN" banks got in the "Bail Out?" What's up with the Senate Finance Committee? Past the house...and back in 1995 Harry Reid was a co=sponsor of legislation to AUDIT the Federal Reserve....now 18 years later and still NO one will hold the Federal Reserve accountable??? WHY? To big to audit....like the banksters who are to big to fail and ho;d accountable? Just slap the banks with ANOTHER fine...and these continue to scheme and lie! Bring back "Glass Stegall! NOW!

October 22 2013 at 4:38 AM Report abuse +1 rate up rate down Reply
adklck

Such poppycock. As a Wharton and harvard Grad School attendee, you could see it coming like the moon coliding with the earth. If you didn't get sick and angry at the radio adds for cheap, no cost home loans, to allow people who never deserved or could afford to live in homes to buy one, with no paperwork or down payment at rediculous loan rates as a coming disaster, You are lost in our new overinformation society surrounded by endless useless information.
This deteriorated into free, no cost loans to homeowners to continually upgrade their homes again and again as thr rates continued to dive until those not capable of paying the lowest mortgages in history started to default. and it mushroomed from their.
The radio adds for these sickening loand were a clear signal of a pending collapse. By the way our good friend Barney Frank in Congress assured us of the strength of the economy just as this was happening big time. It continues to happen as we worry about the "Kardasians" and "Housewives of ???????". This society is doomed !!!!

October 22 2013 at 1:56 AM Report abuse +1 rate up rate down Reply
bp17200etal

Back in early 2006 I was transferred to real estate fraud. Within a month I could see the writing on the wall. I asked my boss to allow public warnings of the upcoming crisis. I was laughed at because Greenspan was telling people to do whatever they had to do to buy a house. I told how foreclosures would go from 1000 a month in LA County to over 10,000 a month. I told how banks like Indymac, World Savings, Freemont and a number of others would go broke. I was transferred. Well, I took my stock market profits from selling those bank stocks short, waited until 2011 and bought at the bottom of the market. I did well but I blame my boss for not warning so many others (though who knows if they would have listened).
Greenspan and others were warned. They just didn't want to believe it. It was too outrageous.

October 21 2013 at 11:51 PM Report abuse +1 rate up rate down Reply
Davie2743

If they paid attention to what was going on in the mortgage market they would of caught it instead of trying to help unqualified people buy homes.

October 21 2013 at 10:31 PM Report abuse +1 rate up rate down Reply
burtwinters.burt

Nov 15th 2014
Sale at your local grocery store : Squirrel on sale $ 29.95 lb stock up today while supplies last!

October 21 2013 at 10:20 PM Report abuse +1 rate up rate down Reply
nseats

No one should let Greenspan continue to claim that he just couldn't see this coming. Many of us who advocate for homeowners saw it coming in the early 2000's and in 2004 the FBI begged
Congress for more money for mortgage fraud - the FBI didn't get the money, in fact the agent I was working with on a mortgage fraud case called to say she had been called off this type of crime and assigned to homeland security. Ditto the criminal attorney at the DOJ. THEY LET THIS HAPPEN and they HAD TO KNOW. Instead they started a war that has cost billions/trillions over weapons that never existed and the criminals on Wall Street became way more wealthy.

October 21 2013 at 10:19 PM Report abuse rate up rate down Reply
pjmducks6

Alan Greenspan is, and was, the Mr. Magoo of economics! His naive belief that markets can "self-regulate" caused him to be asleep at his post so that he never even bothered to investigate how the real estate bubble was being fueled, There is much that the Chairman of the Federal Reserve could have done, but he never even bothered to try!

October 21 2013 at 10:01 PM Report abuse +1 rate up rate down Reply