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Greenspan: revisionist target

The Baltimore Sun

WASHINGTON -- Alan Greenspan's reputation is under siege, and he is incredulous.

Hailed three years ago as "the greatest central banker who ever lived," the retired chairman of the Federal Reserve now is being criticized for his management of the U.S. economy before he retired in 2006. The Fed's low rates and laissez-faire regulatory oversight during his final years are widely blamed for sowing the seeds of today's financial crisis - one that began in the U.S. housing market and is now battering banks, stock markets, borrowers and consumers around the world.

For much of his 18 years atop the world's most-influential economic institution, Greenspan was lionized for the economy's performance. Now, he notes, he's being second-guessed for it.

"I was praised for things I didn't do," Greenspan said during one of three interviews at his sun-drenched office in downtown Washington. "I am now being blamed for things that I didn't do."

Now 82, Greenspan wants to set the record straight before the ink dries on the first draft of the financial crisis' history. The former Fed chief doesn't deny that he cares about his reputation. But the larger issue at stake, he says, is getting the lessons of the crisis right.

"The [wrong] evaluation of this period - and how to avoid the problems associated with it - will give you the wrong answers and the wrong policies," he says.

The scrutiny of Greenspan's record has taken on urgency now that the Bush administration and congressional Democrats are skirmishing over how to overhaul U.S. financial regulation. If Greenspan's critics prevail, then financial companies will likely face tighter oversight and less freedom in the products they offer. If Greenspan's views carry the day, the trend toward self-policing will continue. A repudiation of Greenspan's monetary policies could tempt the Fed to raise interest rates relatively quickly after the current crisis passes, and even attempt to deflate future bubbles with higher interest rates.

Greenspan says he doesn't regret a single decision. The criticisms that get under his skin are those from friends and former colleagues, many of them respected economists who backed his policies at the time but now say, in hindsight, that the calls were wrong. "I do take it seriously if my peers think I have misstated the facts," he says. "But where's the evidence? Too many people make accusations by assertion. I think it's improper."

The prevailing view among critics faults Greenspan on two main counts. First, they say, his Fed lowered rates too much from 2001 to 2003 to cushion the economy from the bursting dot-com bubble. Then it took too long to raise them again. Low rates fueled mortgage borrowing, driving home prices to unsustainable heights. Second, they say, the Fed was lax in its regulatory role. The central bank failed to press for stiffer rules for underwriting mortgages to people who ultimately couldn't afford them, they say. Also, they say, the Fed failed to anticipate banks' exposure to risky homebuyers.

At the time, Greenspan expected his policy to boost housing because the rest of the economy was relatively unresponsive to lower interest rates. Based on decades of his own research, he believed a buoyant housing market would spur consumers to borrow against home values and spend more. This would not produce a housing bubble, he predicted, because it was difficult to speculate in homes and the memory of the 2000 tech-stock bust remained fresh.

Greenspan now acknowledges that he was wrong about the improbability of a housing bubble. But he does not share some foreign central bankers' belief that their job is to defend against excessive asset-price inflation: No sensible policy, he maintains, could have prevented the housing bubble.

"I am reasonably certain that I am right here," Greenspan says. If proved wrong, he says, "I will change. I do not have a vested interest in holding wrong ideas."

Greenspan is particularly perturbed by attacks over a 2004 speech in which he suggested that more borrowers would benefit from adjustable-rate mortgages. Interest rates were at a historical low at the time, which means that those who held on to the mortgages would have seen rates adjusted upward.

Greenspan says the speech merely pointed out that many people who get a 30-year mortgage move or refinance long before it matures. Eight days after giving the speech, he says, he clarified his comments to say he hadn't meant to disparage 30-year fixed-rate mortgages. "In all seriousness, this is really quite unfair," he says.

The biggest question mark over Greenspan's record is his decision to slash interest rates to 1 percent in 2003 and wait to raise them until 2004, and then only slowly. In this debate, Greenspan and his critics seem to speak different languages.

Critics talk about the events that followed - an overheated housing market and a rapid buildup of debt on Main Street and Wall Street, much of which is now painfully unwinding. Such critics are now in the majority.

Greenspan focuses not on events that followed the policy but on the thinking behind it. "I don't remember a case when the process by which the decision- making at the Federal Reserve failed," he says.

He justified the policy that allowed rock-bottom interest rates by noting that at the time, inflation was falling persistently and the risk of deflation - though small - seemed real.

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