Greenspan Defends Low Interest Rates
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.
The current criticism of his time at the Fed notwithstanding, Alan Greenspan guided the economy through the jolt of 9/11, and presided over an unprecedented stretch of 10 years without a recession. When he retired in 2006 at age 79, he was considered almost infallible.
"Now that you're out of government and making real money, I'm wondering how you're investing. Are you investing in real estate?" Stahl asks.
"There are certain questions I never thought you would ask, but knew that if you did I wouldn't answer. And you just hit one of them," Greenspan says.
What about the stock market?
"I'd just as soon not comment," Greenspan says.
Stahl tried again later by asking about his book advance, reportedly $8 million.
"If you could be paid in any currency, in the world, what would you like to be paid in?" Stahl asks.
"Well, as an economist, I would say I couldn't care less, because I could immediately convert it in the exchange markets to whatever currency," Greenspan says.
Greenspan says it doesn't matter what currency he is paid in. "Key question, basically, is, in what currency do you wish to hold your assets," he explains. "And what I've done is I diversify."
It's not a surprise that he wouldn't say which currencies he's holding.
What is a surprise is how personal and chatty his book is. By his own description "The Age of Turbulence" is a "psychoanalysis" of himself. And analyze this: he wrote it in long hand, in a pretty unusual place.
He admits he wrote 80 percent of his book while in the bathtub.
Greenspan pokes fun at himself, especially in the telling of his romance with NBC newswoman Andrea Mitchell, who's 21 years younger than he is. On their first date in 1984, they had dinner, and he invited her back to his apartment for a bit of "romantic" reading.
"Would you believe he did, he did want to show me an essay he had written," Mitchell remembers.
The topic: anti-trust and monopolies.
"On the Sherman Anti-trust Act of 1890," Greenspan says, laughing.
"You know how to woo a girl," Stahl remarks.
But Greenspan says it worked. They dated for 13 years, before he finally popped the question. "I hinted at it several different times," Greenspan recalls.
"He used Fed-speak. Who knew he was proposing? I couldn't figure it out!" Mitchell says, laughing.
For their honeymoon, he took her to an international monetary conference.
His wonkiness and love of statistics go back to when he was a little boy in Depression-era New York City, when he collected railroad timetables, learned Morse code, and memorized baseball stats.
"You're what we would call today a geek. You're a geek!" Stahl jokes.
"Yeah," Greenspan admits. "You know like some people love reading murder mysteries? I loved reading that stuff."
And yet he spent a good part of his young life trying to be anything but an economist: his first dream was to be a professional baseball player.
"When I was 12, and younger, I could hit a curve ball," Greenspan remembers.
Greenspan and Stahl went to a game in Washington recently, and he showed her how he still fills out the scorecard. "This has to be the original Fed speak!" Stahl remarked.
It wasn't his curve ball, but his handling of the economy that had people at the game lining up to get his autograph on dollar bills.
Professional ball didn't work out, so what then?
"I was going to be a professional musician," Greenspan says.
Greenspan was a good enough saxophonist in high school that, instead of going right off to college, he was hired by the popular Henry Jerome Orchestra and traveled the country, playing bebop jazz.
At 17, he was hardly Mr. Cool. While the other band members smoked pot, and drank booze between sets, he read books about the British stock market.
"So all this is going on, and you're sitting over here by the side reading?" Stahl asks.
"I'm in another room," Greenspan recalls. "Another room, sitting there reading a book."
Greenspan has said he ended up doing band members' income taxes.
In the end, he became an economist with his own forecasting firm in New York in the 1950s. That's when he became friends with philosopher Ayn Rand, author of "Atlas Shrugged."
"Was this hot off the press when she gave it to you?" Stahl asks.
"It was still warm when I read it," Greenspan says.
Rand advocated a doctrine of unfettered, unregulated capitalism and Greenspan was one of her most famous disciples, though in a twist of fate, he'd later become the nation's top banking regulator.
Rand had a nickname for her friend: the undertaker.
"She thought you radiated gloom. But Rand also thought that you were too much of a social climber," Stahl remarks.
"I don't know how to respond t that. Everybody is a social climber if you want to put it in one way or another. I mean, and the reason fundamentally is inbred in all of us, is the need to get approval of others. And the ultimate form of getting approval is climbing socially," Greenspan says. "I'm guilty, but then the problem is there's no non-guilties out there."
After years of silence or obtuseness about policies and the people he worked with in Washington, Greenspan opens up in his book, even revealing his personal feelings about the six presidents he knew and worked for, starting with Richard Nixon.
In his book, Greenspan writes Nixon was so profane, it would have made Tony Soprano blush.
Asked if it really was that bad, Greenspan says, "Oh, indeed. He sits down in the room and within the first 30 seconds utters more four-letter words than I had heard in the music business. And I said, 'There's something extraordinarily wrong here.' There are two Nixons."
Greenspan writes that "Nixon was anti-Semitic, anti-Italian, anti-Greek, anti-Slovak, I don't know anybody he was pro."
And Gerald Ford? "Extraordinary human being," Greenspan says.
While Greenspan says Ford was not the smartest, "he was the most normal."
"And that's what you ended up admiring? The normality?" Stahl asks.
"Well it was also the ethical base of the man. We'd be discussing policy and he says, 'Let's forget some of the facts and just do the right thing for the economy,'" Greenspan says.
Greenspan says the other presidents didn't focus to that extent.
Of Ronald Reagan he said he had an "odd form of intelligence" which he used to improve the country's self image.
He writes that he had a, quote, "terrible relationship" with the first President George Bush, who pressured Greenspan publicly, saying in a State of the Union address, "Interest rates should be lower, NOW!"
"I was shocked because nobody talked about Federal Reserve policy in public," Greenspan remembers.
Was this improper?
"Oh indeed, yes," Greenspan says.
Asked, if in his view, a line had been crossed, Greenspan says, "Well, if you have, as we do, by statute, an independent Federal Reserve, it clearly is in opposition to what the purpose of the law was."
President Bush later said it was Greenspan's fault he lost the election in 1992 to Bill Clinton.
Clinton was the only Democrat Greenspan served under, and he says he was the smartest. "Even though I clearly was a Republican, I had to admit he was an extraordinarily effective president," Greenspan says.
"You seem to have gotten along with him best of all your presidents," Stahl remarks.
"That's right," Greenspan agrees. "The bottom line is what he called our relationship when he said, 'We, I think, are the odd couple.'"
Stahl asked what he thought of Hillary.
"Very smart. She and I got along reasonably well," Greenspan says.
Asked if he thinks she can handle the presidency, Greenspan says, "Certainly. I think she's unquestionably capable. The question is she the best person for the job?"
"And?" Stahl asks.
"My tendency would be to vote Republican," Greenspan says.
He got so close to Clinton and his economic team, that he began visiting the White House as often as once a month, something his predecessors had not done.
What was going on?
"Well, I was basically being an economic consultant," Greenspan says.
"But is that proper for the Fed chairman to become an economic consultant of the administration, given the need for the appearance of total independence?" Stahl asks.
"We are one government. The Federal Reserve is not the foreign enemy. I was very knowledgeable about lots of different subjects," Greenspan admits.
"You were influencing policy," Stahl remarks.
"I hope I was," Greenspan says.
That was behind the scenes; in public Greenspan was inscrutable whenever Congress asked about interest rates. He resorted to an indecipherable, Delphic dialect known as "Fed-speak."
"I would engage in some form of syntax destruction, which sounded as though I were…answering the question, but, in fact, had not," Greenspan admits, with a chuckle.
At one hearing, Greenspan said, "Modest pre-emptive actions can obviate the need of more drastic actions at a later date, and that could destabilize the economy."
"Very profound," Greenspan says, after listing to his testimony.
Greenspan personally worked on these "profound" comments.
"But what would often happen is you'd get two newspapers with opposing headlines, coming out of the same hearing," Stahl remarks.
"I succeeded. I succeeded," Greenspan says.
Chairman Alan became "St. Alan" during the robust Clinton years, getting much of the credit for the booming economy, budget surpluses, and soaring markets.
Greenspan became a rock star, with people even thanking him on the street for the growth of their investments.
Wall Street, whose profits soared during his tenure, loved Greenspan, too. They called him "easy Al" for his tendency to slash rates and make money cheap when the markets went down.
Greenspan's most criticized move as Fed chair came at the start of George W. Bush's term, when he supported tax reductions. His testimony, while careful, was read as an endorsement of Bush's massive tax cuts.
"Having a tax cut in place may, in fact, do noticeable good," Greenspan said.
Greenspan had been saying that the surplus should be used to shore up Social Security and Medicare. But he writes that he came to favor a tax cut because he thought without one the surplus would get too large.
"Yeah, but why didn't you think that Congress would never have allowed it to get that far? Why wouldn't you think they would spend it on education, on bridges, on roads or whatever they do?" Stahl asks.
"Because they could have and the numbers were still large enough," Greenspan says. "I never explicitly stated that I was in favor of the Bush tax cut. That's what the Bush administration interpreted, but I never said... I was in favor of 'a' tax cut."
"Several newspapers, when you testified, said that this was, that you'd done this for political reasons. That you did it to, you know, win the hearts of the Bush people. Did you succumb to pressure from the White House?" Stahl asks.
"No, not at all. They never spoke to me about this," Greenspan says. "Look, you can only say what you believe. I went back over that testimony and I must tell you, I would not change a word of it."
Even knowing the outcome?
"Yeah," Greenspan says.
The outcome? The surplus evaporated and the deficits returned. Greenspan had proposed that in that case the Bush administration adjust and trim back the tax cuts. But that never happened.
"Well, remember that their economic policy, largely, was to take the proposals made during the campaign when there was a prospective very large surplus, and that those policies continued in place irrespective of what was happening to the surplus," Greenspan says.
"That's very rigid," Stahl remarks.
"I don't know if it was rigid, it was wrong," Greenspan says.
Greenspan says he was especially surprised and disappointed by his old friend Dick Cheney. "He was much less focused on restraining spending than I would have liked," Greenspan explains.
Cheney has said deficits don't matter, but Greenspan says, "Well, I think he was mistaken on that."
Greenspan is out of government now for the first time in 20 years. He set up an economic forecasting firm, Greenspan Associates, and he predicts the current fear sweeping the markets will subside.
Asked if he thinks this is going to have a deep lasting effect throughout the economy, in jobs, consumer and spending, Greenspan says, "It's not clear yet. And it will not be clear for quite a while. This is fundamentally, originally caused by the flattening out of home prices. And that is only now just beginning."
"Prices are going to fall further," Greenspan predicts.
"Well, what we've already begun to see is not just that housing prices are falling but that it's affecting the job market for anything related to housing, including real estate, including the sales of appliances and furniture. " Stahl remarks.
"But there is an underlying strength in the United States. And, indeed, when you look around the world, even with this extraordinary credit problem, the economies seem to be holding up," Greenspan explains. "But for the moment it does not look sufficiently severe that it will spiral into anything deeper."
"We're going to get through this particular credit crunch. We always do. This is a human behavior phenomenon, and it will pass. The fever will break and euphoria will start to come back again," Greenspan says.
But he does see clouds on the horizon. "Over the long run, this is not going to be what our problem is. Our problem over the long run is the re-emergence of inflation," he says.
"This is interesting because in your book, your outlook on the broad future is pretty gloomy. Interest rates going up, you say. Inflation going up," Stahl says.
"Yes. Indeed I have a line in the book, 'It looks pretty gloomy,'" Greenspan agrees.
When he was chairman, his public statements had enormous power. As he's finding out, they still do. In February, he rattled the markets by predicting there was a one in three chance of a recession this year. It forced the current Fed Chairman Ben Bernanke to try and calm things down, and raised questions about the propriety of his speaking out.
"This isn't like any normal forecaster going public," Stahl remarks.
"So I then become incarcerated and I'm not allowed to do anything because I might say something?" Greenspan asks.
What's his responsibility?
"My responsibility is what I am doing now," Greenspan says. "I'm not commenting on monetary policy, I'm commenting on global things."
"Yeah, but the comment that has most people upset was your prediction about a recession," Stahl points out. "That you shouldn't be commenting…on recession-inflation."
"But how am I going to pursue my profession without doing precisely that?" Greenspan asks.
"Well you know, sometimes people in Congress have this rule that they can't work in related fields, or can't become a lobbyist for x amount of time. Should there be a respite here?" Stahl asks.
"There was," Greenspan says. "For a year, I was not allowed to go lobby the Fed, which I have never done,"
Greenspan says there's no restriction about speaking and he doesn't think there should be one. He also doesn't think he should impose restrictions on himself.
When he's not working these days, he does what he's always done to relax: he flips through government reports with all those geeky numbers.
"He loves these data. I mean, I mean look at this stuff here," his wife, Andrea Mitchell, tells Stahl, looking at his morning reading, including a report from the Bureau of Labor Statistics.
"I just love getting into the detail of what the…say, protein content of hard red winter wheat was because…the differential in price. The differential in price between…," Greenspan says.
"It's very romantic," Mitchell remarks.
"…Kansas City and Chicago was…," he says laughing. "No, it was romantic to me. That's what the joke is. And I'm still that way. I really just love that stuff."
Produced By Karen Sughrue
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