Alan Greenspan and a river in Egypt

For somevery good insight into how opinions regarding Alan Greenspan are slowly changing, have a look at Greenspan Stands His Ground in the Washington Post today.

There are a few excerpts from a recent interview with the former Fed chairman in a separate story, but the bulk of the main article by Steven Mufson consists of other economists bashing the man some still call the Maestro.

Perhaps the Maestro composed some discordant notes after all.

The record of longtime Federal Reserve chairman Alan Greenspan -- worshipped by business leaders and dubbed "Maestro" in a 2000 biography by The Post's Bob Woodward -- is getting a critical look as his successor Ben S. Bernanke wrestles with problems that began on the Maestro's watch.

Many economists blame Greenspan for lax bank supervision and for keeping interest rates too low, too long from mid-2003 to mid-2004. That, the theory goes, fueled the housing bubble and spawned subprime and adjustable-rate mortgages for low-income people, vast numbers of whom can't make their payments now. Banks bought those mortgages in bundles that are worth far less than they originally were. That has led to big write-offs, shaking the entire financial system.

In an interview yesterday, Greenspan said the Fed wasn't to blame. He said that global forces beyond the control of the Federal Reserve had kept long-term interest rates low, fueling the housing bubble earlier this decade. "Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time," he said. "I don't know of a single example of when interest rate policy has been successful in suppressing gains in asset prices."

Regarding the current turmoil, Greenspan said that a market crisis was inevitable. "If it weren't the subprime crisis it would have been something else," he said. That is because an era was ending that had seen "disinflationary forces" from developing countries such as China and a "protracted period" in which there was an "underpricing of risk."

Not all economists are ready to let the former Fed chairman off so easily.

The report goes on to detail criticism by the following individuals along with some very flimsy retorts from the former Fed chairman:

• Lee Hoskins - former president of the Cleveland Fed
• Kenneth Rogoff - Harvard economics professor and former IMF chief economist
• Alan Blinder - Princeton economics professor and former Fed Vice chairman
• Ned Gramlich - former Fed governor under Greenspan (now deceased)
  

In the separate interview excerpts story, note the following comments on adjustable-rate mortgages:

"I was convinced at the time and am convinced now that the level of adjustable-rate mortgages . . . wasn't a serious problem for attracting people into the market who then got caught [by higher rates]. People who had taken out loans in June 2003 at adjustable rates could have converted those to long-term fixed-rate mortgages at a profit over the next 18 months. And people didn't. And the reason they didn't. . . . Put it this way: They should have. I don't know frankly why they didn't. Long-term rates were low. Refinancing would have been a good decision."

A few smart peopled did just that, however, most people who got sucked in to the last of Alan Greenspan's bubbles did not.

File this comment under the heading "childlike in his idealism".