Alan Greenspan, the former chairman of the Federal Reserve, told CNBC in a documentary to be shown Thursday night that he did not fully understand the scope of the subprime mortgage market until well into 2005 and could not make sense of the complex derivative products created out of mortgages.
“So everybody in retrospect now knows that that boom was developing under the markets for quite a period of time, but nobody knew it,” Mr. Greenspan told CNBC’s David Faber. “In 2004, there was just no credible information on that. It wasn’t until we got well into 2005 that the first inklings that that was developing was emerging,” he said.
Mr. Greenspan’s critics have argued that the former Fed chairman expanded the money supply well beyond the growth in the nation’s gross domestic product by keeping interest rates too low for too long.
The Fed’s “easy money” policy created an excess of cash that inflated equity and asset prices, leading to both the technology bubble of the late 1990s and the housing bubble in this decade.
While Mr. Greenspan acknowledges that he could have done something to avert the housing crisis, he contends his hands were tied.
“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress?” Mr. Greenspan said. “When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”
Mr. Greenspan said that if he had taken steps to prevent the crisis, the outcome would have been painful.
“We could have basically clamped down on the American economy, generated a 10 percent unemployment rate,” he said. “And I will guarantee we would not have had a housing boom, a stock market boom or indeed a particularly good economy either.”
Mr. Greenspan also lays the blame on the ratings agencies and the people that trusted their judgment for the proliferation of the mortgage derivatives that were a major part of the current financial crisis.
“What we have created in this world is an aura around the credit rating agencies about certification from them is the Good Housekeeping seal of approval, ” Mr. Greenspan said. “I will tell you the record of a lot of the forecasters of ratings have not been distinguished. They never were.”
The interview is part of a two-hour documentary, “House of Cards,” to be shown on CNBC on Thursday, Feb. 19th at 8 p.m. and 12 a.m. Eastern time.
Before creating the Federal Reserve system, President Franklin D. Roosevelt should have heeded the dire warning given by Thomas Jefferson way back in 1802:
“Banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.”
…because that is exactly what has happened.