Greenspan Defends Low Interest Rates

Former Federal Reserve Chairman Talks To Lesley Stahl About Subprime Mortgage Meltdown

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Alan Greenspan may go down as one of the best chairmen of the Federal Reserve in American history. His 18-year tenure was marked by unprecedented economic growth, budget surpluses and a booming stock market. And he was praised universally for shepherding the economy through the shock of 9/11.

Now he has written his memoir, "The Age of Turbulence," which comes out just as he's coming under fire -- something he's not used to -- for today's housing and lending crises. His critics say he established a pattern of bailing out Wall Street investors.

Greenspan sat down with correspondent Lesley Stahl for his first major interview, defending himself against the criticism that he should've done something to stop the shady practices in subprime lending. In a rare admission, he told 60 Minutes he missed its significance.

Asked why he didn't speak out, if he knew these practices were going on or even suspected that there was something illegal or shady, Greenspan admits, "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. I didn't really get it until very late in 2005 and 2006."

But others at the Fed did get it -- that banks and mortgage companies had already signed up millions of home buyers and speculators, many with poor credit, for so-called subprime mortgages with complicated interest rate adjustments that have led to record numbers of defaults. Some of the practices were fraudulent.

One of his former Fed governors, Ed Gramlich, said that he proposed that the Fed examine these lending practices and look into them to see if something could be done. Greenspan rejected that idea.

Why did he reject it?

"I thought that…we would not be capable of doing what he was suggesting," Greenspan says.

"But if sitting on them, taking some regula-what…" Stahl asks.

"Well, I think not," Greenspan replies.

"Even looking into it?" Stahl asks.

"It's nothing to look in to 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," Greenspan says.

He insists there's nothing he could've done to prevent today's plummeting home prices and the fact that a million families have lost their homes, and many more could. But some economists now say Greenspan actually created the housing bubble and the credit crunch by keeping interest rates too low for too long.

"Just remember we raised interest rates at every meeting from June of 2004 till I got out of office," he says.

"You raised rates in 2004. But only after you held interest rates at historically low level for three years, while the bubble, the housing bubble was forming," Stahl points out. "And that you had 13 rate cuts in that period of time."

"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," Greenspan explains.

But some of the Fed governors who worked with Greenspan at the time are now saying that they think interest rates were too low for too long.

"I think they were mistaken," Greenspan says.

What this shows is how certain he is about his views, and how firmly he guided the Fed when he was Chairman and dealt with shocks to the financial markets by quickly lowering interest rates. Now in the current turmoil investors are calling on his successor Ben Bernanke, "to do what Greenspan would've done."

"The sense is you would have acted sooner. You would have thrown more cash and liquidity in the system. That you would have acted faster and more dramatically," Stahl remarks.

"I'm not sure that's true and let me tell you why," Greenspan says. "We were dealing in an environment back there where inflation was easing. We could have acted without the fear of stoking inflationary pressures. You can't do that any more. And therefore it's a different world. I'm not certain I would have done anything different were I there."

Asked if he doesn't think he would have acted faster, Greenspan tells Stahl, "I doubt it."

"You don't see any light between you and what Mr. Bernanke's doing?" Stahl asks.

"I think he's doing an excellent job," Greenspan replies.

"The CEOs of Ford and Chrysler are begging the Fed to lower rates. I mean, on their hands and knees," Stahl remarks.

"I would suggest they focus on selling, creating better cars for their customers," Greenspan says.