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]