Greenspan Rejects Interest Rates Criticism

Greenspan Rejects Interest Rates Criticism

Sydney Morning Herald
9 April 2008
Jacob Saulwick

THE former chairman of the US Federal Reserve, Alan Greenspan, has defended his role in the lead-up to the subprime crisis, saying there is little evidence that low interest rates contributed to an unsustainable housing bubble.

Dr Greenspan's record has been criticised by some economists since a wave of mortgage defaults in the US triggered a meltdown in financial markets and shudders through the world economy.

The criticism is levelled at the period when the Greenspan-led Fed slashed interest rates in response to the collapse of technology-stocks in 2001.

But in London's Financial Times on Monday, Greenspan said the evidence that monetary policy - or interest rate settings - stoked the bubble in house prices was "statistically very fragile".

House prices had jumped throughout the world, not just in the US, he wrote, due to a global fall in long-term interest rates.

Greenspan, who was Fed chairman for 18 years, also defended its failure to prevent banks and others lending money to people who had little chance of repaying.

Even if authorities had had full rein to intervene, Greenspan wrote, they would have struggled to prevent the subprime debacle because they could not have known enough about the market they were trying to change.

"Bank loan officers, in my experience, know far more about the risks and workings of their counterparts than do bank regulators," he wrote.

He said the core of the problem lay with investors who had not grasped the risks of the mortgages they were buying.

"Subprime delinquencies and foreclosures were modest at the time, creating the illusion of great profit opportunities."

Greenspan has dubbed the crisis "the most wrenching in the last half century and possibly more".

Under his charge, the Fed slashed its funds rate from 6 per cent to 1.75 per cent in 2001.

His successor, Ben Bernanke, has made a similarly aggressive move. Since September, the Fed has cut rates from 4.75 per cent to 2.25 per cent..

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