Here’s a laugher: “In a detailed review of the causes of the financial crisis, former Federal Reserve Chairman Alan Greenspan acknowledged a range of regulatory failures but strongly disputed the widely held view that the Fed left interest rates too low for too long.”
Oh, it gets even worse:
“In Mr. Greenspan’s 48-page review of the causes and consequences of the crisis, the text of which was released by Brookings, he acknowledged that the regulatory system failed, that Fed officials didn’t take seriously enough the risks building in the subprime mortgage market last decade, that regulators more broadly didn’t demand that banks hold enough capital and that he didn’t do enough to rein in “megabanks,” that posed a risk to the financial system.
He offered a full-throated defense of the interest-rate policies he championed. Low rates did play a role in spurring a housing bubble last decade, Mr. Greenspan said. But it wasn’t the short-term rates he controlled, he said. It was longer-term rates, which were driven lower by a flood of savings released by emerging markets into the global financial system.
The Fed pushed its benchmark interest rate—the federal-funds rate—to 1% in 2003, to fend off a dangerous bout of deflation. Some critics say this fueled adjustable-rate mortgage borrowing, bank risk-taking and the housing boom.
Mr. Greenspan says rates on 30-year fixed-rate mortgages drove the housing boom, not the overnight lending rates the Fed controls. Because of the flood of foreign capital, he said, longer-term rates became less closely linked to the federal-funds rate during the boom, something he described at the time as a “conundrum.””
Discuss . . .
Greenspan Defends Low-Rate Policy
WSJ, MARCH 18, 2010