Should the federal government bail out lenders and borrowers caught up in the subprime mortgage crisis? It's a simple question but, like everything else surrounding the high-risk, high-cost loans, the answers are far from simple.
Global forces beyond the Federal Reserve's control helped fuel the bubble that led to the current housing meltdown, former Fed Chairman Alan Greenspan said Thursday. In an NPR interview, Greenspan also said that the odds of a recession are "clearly rising."
This week, Greenspan wrote a commentary in The Wall Street Journal looking at the roots of the current mortgage crisis. In the article, he defended the Fed's decision to keep rates low — a move that some people say fueled the housing bubble.
'Extraordinary Forces of Globalization'
"The problem is not explaining myself," Greenspan told Steve Inskeep in an NPR interview. "The problem is getting a focus on how to look at the world's economy more appropriately. Certain things are happening in the world which are affecting central banks, have affected central banks, essentially because of the extraordinary forces of globalization that arose subsequent to the end of the Soviet Union."
Greenspan rejected the criticism that the Federal Reserve fueled the housing bubble by lowering interest rates.
That argument "doesn't coincide with the facts," he said. "First of all, we've had housing bubbles in two dozen or more countries around the world ... everybody's long-term rates have gone down."
Fed 'Lost Control' of Long-Term Rates
Greenspan noted that there has been a disconnect in recent years between the Fed's short-term rate moves and long-term rates, such as those that apply to mortgages.
When the Fed began to raise rates in 2004, the central bank had expected to get — "as a bonus" — a rise in mortgage rates, Greenspan said. But that didn't occur, he said.
"We concluded that the monetary forces that were arising in the world globally had become so overwhelming, relative to the resources of central banks, that we had effectively lost control of long-term interest rates and the forces directing higher prices and homes," he said.
Asked if the Fed could have prevented, or eased, the U.S. housing bubble, he said, "There's only one thing we could have done — cutting off short-term credit. But that would have broken the back of the economy and brought the housing boom down."
Short of raising interest rates dramatically, "the evidence is very clear that there was nothing that any central bank could have done, or tried to do."
He said the housing meltdown was "inevitable in one sense: When you get a type of euphoria building in an economy, you're dealing with the innate aspects of human nature. And I've watched bubbles inflate and deflate for 60 years. I'm pretty much convinced that we will never be able, by monetary or fiscal policy or government actions, short of disabling the economy, (to undermine) those bubbles.
"Eventually, this has to defuse itself," he said.
Economy Close to Stalling
Greenspan said it's too soon to say whether a recession is coming, "but the odds are clearly rising."
"We're getting close to stall speed" in economic growth, he said. "And we are far more vulnerable at levels where growth is so slow than we would be otherwise.
"Indeed ... somebody who has an immune system which is not working very well is subject to all sorts of diseases, and the economy at this level of growth is subject to all sorts of potential shocks."