Greenspan "Didn't Really Get" That Subprime Lending Could Hurt The Economy

Former U.S. Federal Reserve chairman Alan Greenspan told 60 Minutes that he “didn’t really get” that irresponsible subprime lending could be significant enough to hurt the economy, but he still defends the decision to keep interest rates low from 2001-2004.

Critics are now saying that these low rates were the cause of the crisis.

Bad news for Greenspan who is set to release his book, The Age Of Turbulence, on Monday—just as his successor considers a rate cut that many say is needed to prevent the subprime meltdown from taking down the rest of the economy.

From CBS News:

Greenspan says he knew about the questionable subprime 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.

Is it Alan Greenspan’s fault that subprime lenders defrauded their customers, qualified people who worked at Taco Bell for $700,000 homes, inflated estimates, pushed ARM loans on people who could have qualified for fixed rate loans, etc.. We don’t know, but it’s a hell of a time to go on a book tour, Alan.

Greenspan Defends Low Interest Rates [CBS News]

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  1. Trai_Dep says:

    This is the same idiot that sat on his hands while the dot-com debacle perculated, bubbled then exploded, destroying billions in the process.

    Then, the George Bush of finance gives Congressional testimony lamenting the fact that the US budget surplus (remember those?) was too big, giving cover for the Republicans to make Reagan’s deficits seem miserly in comparison.

    Finally, the smug idiot said, “Who knew?” to a scheme that stripped responsibility for making bad loans from the lending entity, a structural check that’s kept the banking sector largely solvent for millenia. A couple harshly-worded phone calls to the right officials would have nipped this in the bud. Instead, he destroys yet more billions.

    Geezus, what a stupid tool.

  2. beavis88 says:

    The most (simultaneously) amusing and disturbing thing about this whole “crisis” is that really smart people who are in the business of knowing about this sort of stuff missed the boat, while total idiots like me could plainly see the bill was going to come due in a bad way, and soon…

  3. stuckonsmart says:

    I must be a FREAKING GENIUS! I saw this years ago with my eyes wide shut. Remember the S & L debacle which Bush and family were in the middle of also???

    Do you think Random House will give me a million dollar book advance on revealing my secrets?

    Never mind — I’m giving them away here:
    1) Live below your means. If you can’t afford it, DON’T buy it.
    2) Save for a rainy day. In our case hurricane Katrina got us. But because we saved, we had options and waited on no one or nothing to make critical life decisions for us.
    3) Remember that proportion of risk is directly relational to degree of potential reward.
    4) Self responsibility and self reliance will keep out of trouble and/or get you out of trouble every time.
    5) Debt is DUMB, DUMB, DUMB.
    6) Spending to impress others is STUPID and MEANINGLESS. The only impressions that are REALLY important are the one in your mirror and your Creator.
    7) Giving and sharing is GOOD, GOOD, GOOD.

  4. stanfrombrooklyn says:

    Japan has had interest rates as low as 1% in the last few years so you can’t just blame low interest rates. You need to blame lack of regulation in the industry, a lack of accountability on Wall Street, and a culture where people refuse to live within their means.

  5. chili_dog says:

    Really, who was sounding ANY alarm about the sub-prime issue? No one I can recall. I remember some speaking about over valuation and the potential for a bubble burst if the prices continued to climb unabated. But really never anything about the sub prime potential.

    I don;t believe ANYONE really grasped how bad the lending had become because what lender would finance 110% on a 2 year ARM to a borrowers debt ratio of 35%.

  6. chili_dog says:

    @stuckonsmart: “bushies in the middle of it”?? Apparently your knowledge of Neil Bush running only 1 of literally thousands of S&L’s is greatly superior to the fact that the direct result of the meltdown can be tracked to the Carter Administration and the Congress changing of the certain banking rules and the insurance coverage rates of the FDIC.

    But certainly don’t let historical fact get in the way of hate.

  7. BrockBrockman says:

    So, is 60 Minutes trying to blame Greenspan and low interest rates as the reason we are in a supposedly economic downturn?

    I’m no economist, but this strikes me as the same kind of argument that lowering gas prices will melt all of the icecaps. Technically true that one is related to the other, but there’s a lot of stuff that can go on in between low gas prices and flooding our coastlines.

    Same with the subprime fallout – there’s a lot of stuff that happens between a low interest rate and a harmed economy.

  8. Trai_Dep says:

    @chili_dog: nah, untrue. The moment I heard it was even possible to get a loan based on self-reported income, then zero-down (then again) interest-only payments, several friends and I simultaneously said, “Really, stunningly bad idea.” Esp in combination.

    When we found out that banks immediately pushed these “high yield” loans (ha-ha, not so “high” now, huh?) off their books, we went, “Uh oh – that’s madness”

    Finally we predicted that with the demand side awash in new capital, supply and price were going to skyrocket. Not even taking into account all that money “stagnating” since it was sitting out the stock market beacause of the dot-com bust.

    We’re not economists, nor finance wizards, nor absurdly-paid arbitregeurs. Just applied common-sense to a really dumb set of changes that the Republicans pressured the Fed, the SEC and other regulatory entities into ignoring. Because, you know, ALL gov’t regulation is evil (but destroying $trillions = OK!)

    Later, finding out how the Wall Street firms packaged “secured” bonds was icing on the cake – the same idiots who recommended Buy for Enron until after its collapse assigning risk?! – confirmed our suspicions. Gilt lillies, by then.

    If WE could seet this trainwreck years before it happened, so could they. They can’t argue, “Who knew?” now.

  9. Trai_Dep says:

    @BrockBrockman: There’s a LOT of behind-the-scenes stuff that the Fed does besides set the Fed Rate. Surely you don’t think they sit motionless in a closet someplace until a rate change is announced? Most of their influence is in this backroom arm-twisting/”suggested” advice.

  10. Timbojones says:

    The Federal Reserve is an intrinsically broken system which must be eliminated as quickly as possible. Every dollar printed must be paid back to the central bank with interest. Every dollar has some extra debt attached to it, beyond its face value. The only source for paying that debt, is more dollars, which also come with a little more debt. The Federal Reserve is the ultimate source of all debt, and has been choking this country for too long.

    Fuck Greenspan.

  11. du2vye says:

    The housing market it a bubble ready to pop and Greenspan propped it up so that Bush could say the economy was doing well when it wasn’t. No one (who should have known) saw it because they were too busy making money in the bubble. Clinton left in a mild depression. Bush changed how the economy was reported so that it would look like a recession. All he cared about is what it looked like so he wouldn’t have to face the nation too soon – before he sold it off to his croonies. The IMF and EU have been aware of this for years. That’s why they want to uncouple from the U.S. market.

    Remember, the U.S. is broke and Bush has been selling our assests off in the name of priviitialization. Under Bush, the Mexican economy may start looking good. I’m not kidding.

  12. Rusted says:

    @beavis88: Yeah, all those smart guys… Do they even know what’s happening on the street? Seeing quite a few people from other states coming to North Carolina for work. The recession is now.

  13. humphrmi says:

    Wow, I wish I saw this article on Friday, now I’m posting probably after everyone has stopped reading it.

    Blaming low interest rates for the sub-prime meltdown is a misdirection. They had a part in it, but not as much a part as, say, the ratings agencies who overrated the securitized mortgages-cum-bonds that needed higher-than-junk ratings in order to be sold to pension funds. You can blame the investment banks that securitized them to begin with. You can blame the mortgage brokers, banks, and lastly you can also blame the stupid people who took them out. But saying “low interest rates caused the sub-prime bubble” is like saying that the gas you pumped into your car caused it to run over your neighbors dog, or cheap rope causes suicide hangings.