Analyzing the Crisis
He has also thrown himself into analyzing the current crisis, immersing himself in economic data as he did at the Fed -- though now without 200 Ph.D. economists to assist him. The questions his clients currently ask go to the heart of his own legacy: What drove the housing and mortgage bubbles? How far will they deflate? What will happen to the economy?
Unable to find out how many homes are bought with subprime mortgages, Mr. Greenspan spent several months designing his own data system. Some of what he has learned is going into a new chapter for the paperback edition of his book, to be released Aug. 26. It will explain events after last June, when he finished writing the original.
The biggest question mark over Mr. Greenspan's record is his decision to slash interest rates to 1% in 2003 and wait to raise them until 2004, and then only slowly. In this debate, Mr. 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: In a recent Wall Street Journal survey of 55 economists, 84% said the Fed was too slow to raise rates. Two members of the policy-making Federal Open Market Committee at the time -- William Poole and Robert Parry, presidents of the Federal Reserve Banks of St. Louis and San Francisco -- have both recently argued that, in hindsight, rates were too low for too long.
Mr. 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 says rock-bottom interest rates actually went against his "19th century" aversion to easy money. "My inner soul didn't feel comfortable," he says. He justified the policy by noting that at the time, inflation was falling persistently and the risk of deflation -- though small -- seemed real, despite his prior assumptions that it was impossible with a dollar unlinked to gold.
To prevent deflation, the Fed spurred growth by keeping interest rates low. At the time, he notes, the only dissenting votes on the Fed policy committee were those who wanted to set rates even lower. The Fed, he said, initially raised rates gradually to give businesses and investors time to prepare. In 2004 and 2005, it raised rates faster than private economists expected.
That judgment is now being questioned by Mr. Greenspan's peers, including Stanford University economist John Taylor. The Treasury Department's top international hand from 2001 to 2005, Mr. Taylor is famous in academic circles for his Taylor Rule, a formula the Fed and other central banks use as a guide to setting interest rates.
At a 2005 Fed conference in Jackson Hole, Wyo., where the world's monetary elite gather each year, Mr. Taylor agreed with a study presented there by two Princeton economists who concluded that Mr. Greenspan was history's greatest central banker. Mr. Taylor credited Mr. Greenspan for the nation's "extraordinary economic performance," praising in part his "timely" rate cuts in 2001 to 2003 and, later, his "well telegraphed" rate hikes.
Mr. Taylor struck a different note last August. Speaking at the same Jackson Hole event, Mr. Taylor used his own model to argue that rates were kept too low for too long, overheating housing prices and setting the stage for a bust. He repeated the charge before Congress in February.
The critique is painful for Mr. Greenspan. The men have been friends since the mid-1970s, when Mr. Greenspan was chairman of President Ford's Council of Economic Advisers and Mr. Taylor was on staff. Mr. Greenspan later hired Mr. Taylor to work with his consulting firm, Townsend-Greenspan & Co.
Vintage Greenspan
Earlier this year, Mr. Greenspan invited Mr. Taylor to lunch at his office and challenged his former protégé's assessment. In Mr. Greenspan's view, if the Fed's policies were to blame, the housing bubble would have been mostly limited to the U.S. Yet, he argued, many other countries had housing bubbles, too. A better culprit, he suggested, was the glut of savings globally. Savers were competing to make loans, keeping long-term interest rates low in many countries and fueling housing demand.
Mr. Taylor countered that there was no savings glut, citing data that showed world savings equaled world investment. Mr. Greenspan called Mr. Taylor's data "irrelevant." Interest rates are affected by intended investment rather than actual investment, Mr. Greenspan argued, adding that intentions are hard to measure.
The discussion, if arcane, was vintage Greenspan. The former Fed chief has long differed from conventional economists in his disdain of models and his readiness to second-guess economic data. While that has given him insights that escape his peers, it has also created chasms in the ways he and they see the world.
Mr. Taylor says he stands by his 2005 praise of Mr. Greenspan's tenure as a whole. "Monday-morning quarterbacking" of a few episodes, he says, "shouldn't change the overall assessment."
Mr. Greenspan's regulatory record has also come under review. The Federal Reserve is charged with supervising banks and enforcing and interpreting consumer-protection laws such as the Home Ownership and Equity Protection Act. Today, Mr. Greenspan's hands-off oversight is routinely cited for lax lending standards that steered many borrowers toward mortgages they ultimately couldn't afford.
Mr. Greenspan says that on regulatory issues, he deferred to the Fed's staff or to the Fed governor in charge of consumer matters. Former Fed officials concur but some add that senior staff reflected Mr. Greenspan's distrust of regulation. Without a prod from its chairman, they say, the Fed was often slow to expand consumer protection.
Mr. Greenspan scorns the notion that he intimidated others into falling in line. "What I find amusing is that history is being rewritten with me being portrayed as a force that overwhelms and persuades all these highly educated, very intelligent people to do my bidding," he says. "That's just silliness. It's a terrible rewrite of history."
The Fed took several steps to tighten oversight of subprime lending, but until last year, none were aimed at the type of adjustable-rate subprime mortgages whose phenomenal growth in 2005-06 is at the root of the current crisis. Mr. Greenspan notes the Fed lacked good data on those mortgages.
Fed Seal of Approval
On at least one occasion, Mr. Greenspan did resist colleagues who urged further oversight. In 2000, then-Fed governor Edward Gramlich, who was in charge of the Fed's consumer affairs, proposed to Mr. Greenspan that the Fed's staff examiners look for abusive lending practices in banks' lightly regulated mortgage affiliates.
In an interview with The Wall Street Journal last June, three months before his death, Mr. Gramlich said that at the time, he generally considered subprime loans a good thing. He didn't then know the extent to which the loans would become a problem, but he wanted the "Fed to be a leader" in cracking down on predatory lending.
Mr. Greenspan recalls that he demurred, saying that the Fed shouldn't have oversight of these lenders. Shady operations could portray their Fed-regulated status as a seal of approval, he suggested, giving them unearned credibility with customers.
Since the interview with Mr. Gramlich was published, it has been cited repeatedly as evidence of Mr. Greenspan's neglect. Asked about it, Mr. Greenspan draws a piece of paper from his desk. It is a letter in Mr. Gramlich's shaky handwriting, written a few days before his death last September.
"You were a magnificent central banker and a great leader," Mr. Gramlich wrote. "I truly wish the press would stop kicking you around on this subprime supervision issue. What happened was a small incident." (
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Write to Greg Ip at
greg.ip@wsj.com
From the Wall Street Journal
Former Fed chief Alan Greenspan calls some of the criticisms of his tenure 'quite unfair.'
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