It's sort of funny how everybody praised low interest rates when we were trying to combat a recession... now they blame Greenspan for slimy lending practices. Hindsight is 20-20.
Editorial
Mr. Greenspan Spins the Bubble
In recent interviews to plug his new memoir, Alan Greenspan has — surprise surprise — obscured more than he has clarified.
He has engaged, seemingly with verve, the question of whether he caused the housing bubble and subsequent bust by keeping interest rates too low for too long after 9/11.
Anyone who sells real estate and many economists say the answer is yes. According to Mr. Greenspan, the answer is yes and no. He says that rock-bottom rates were one of several economic forces inflating the bubble and that, in any event, they were necessary at the time to avert greater harm to the economy.
One thing is sure. As long as Mr. Greenspan is defining the terms of the debate, there will never be an illuminating discussion of what went wrong to land the economy in the place it is today.
The important issue now is not whether, or to what extent, low rates caused the bubble. Easy money, wherever it came from, led to lax, dubious and even fraudulent mortgage lending on a broad scale. The issue is what the Fed did, under Mr. Greenspan’s leadership, to rein in that lending. The answer is nothing.
That was derelict, perhaps willfully so. In 1994, Congress gave the Fed broad authority to regulate unfair, deceptive and predatory lending, whether by banks or nonbank lenders. Yet Mr. Greenspan rejected a Fed governor’s proposal to examine lending practices, with an eye to curbing the excesses. Asked on CBS’s “60 Minutes” on Sunday why he did that, Mr. Greenspan said, “I thought that it — one would not be — we would not be capable of doing what he was suggesting.”
To the contrary, putting a stop to bad lending practices is precisely what the Federal Reserve has the power and obligation to do.
Mr. Greenspan was not inclined to use that power, preferring to adhere to a silly notion, shared apparently by the Treasury Department and by federal securities regulators, that market discipline would always and everywhere keep lenders — and the bankers who created derivatives based on the loans — in line.
The Fed is one of five federal banking regulators. The states also have regulatory powers. That fragmentation complicates the supervision of lenders. But the Fed is first among equals in the regulatory scheme of things, with the clout to put its concerns at the top of all regulators’ agendas. Its regulatory laxity under Mr. Greenspan set the tone for laxity throughout the system.
It’s not important how Mr. Greenspan sizes up his tenure at the Fed. What’s important is that Congress learn the right lessons from the bubble and the bust. Among those lessons is the need for updated and streamlined regulation of lenders and stringent oversight of regulators to ensure that they are doing their jobs.
Copyright 2007 The New York Times Company |
