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Former Federal Reserve Chairman Alan Greenspan is fighting back against claims that his agency and his tenure as its chief caused the housing bubble that is partly blamed for the economy’s descent into a recession.
Greenspan, in an opinion piece published Tuesday evening on the Wall Street Journal’s Web site, acknowledges that “we are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s.”
He also notes that the Federal Reserve’s past “easy money” policies — its use of low interest rates to encourage borrowing and stave off inflation — is one possible culprit. But he argues that a “far more credible explanation” is that it was the rate on long-term fixed-rate mortgages, not the federal-funds rate, which affects short-term borrowing.
Greenspan has been a prominent target as lawmakers and economist pinpoint blame for the current economic mess. Lending practices, particularly in the mortgage industry, as well as the trading of those loans as complex securities, is widely believed to have contributed to the downturn, with bank closures becoming a common occurrence.
But while Greenspan doesn’t deny the role of lending, he asserts in his Journal piece that there were a number of factors other than Fed policy at play.
“If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle,” Greenspan says. “If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue.”
The piece comes after present Fed chairman, Ben Bernanke, said Tuesday that the nation’s financial rule book must be rewritten to prevent a repeat of the global economic crisis now gripping the United States and other countries.
“We must have a strategy that regulates the financial system as a whole … not just its individual components,” Bernanke said in a speech to the Council on Foreign Relations.
Bernanke offered new details on how to bolster mutual funds and a program that insures bank deposits. He also stressed the need for regulators to make sure financial companies have a sufficient capital cushion against potential losses.
