STEVE INSKEEP, host:
Now, the man who became a celebrity for the way that he raised and lowered interest rates is our next guest. On Friday we talk about money, and today we talk with Alan Greenspan, who presided over the start of a housing bubble that has turned into a credit mess that is affecting the old economy.
As that bubble gained speed, the Fed lowered short-term rates as low as one percent, and some say that fueled the bubble. This week, Greenspan defended himself, first in a column in the Wall Street Journal, and then when he dropped by our studios.
Mr. ALAN GREENSPAN (Former Federal Reserve Chairman): The problem is not explaining myself. 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.
INSKEEP: Well, let me stop you for a second because there is a simpler version of this story that is sometimes told. Alan Greenspan lowered interest rates, fueled a housing bubble, and got us in the lot of the trouble we're in right now. What's wrong about that analysis from your point of view?
Mr. GREENSPAN: It doesn't coincide with the facts. First of all, we've had housing bubbles in two dozen or more countries around the world, all of which look almost identical to ours. And the reason why we've had these bubbles everywhere is everybody's long-term rates have gone down, and that in turn I trace back to the extraordinary events that occurred when central planning became an obviously inefficient way to operate an economy.
INSKEEP: You're talking about the collapse of the Soviet Union and related events in the early '90s.
Mr. GREENSPAN: Exactly. And in fact that we are seeing global forces dominating long-term interest rates is getting ever more obvious.
INSKEEP: I suppose we should remind people that if you're the Federal Reserve chairman, you don't directly control long term interest rates that a bank would give on a 30 year mortgage. What you've got to control is a short term interest rate, which may influence that long term interest rate.
Mr. GREENSPAN: Correct. And what we found in 2004 when we started to tighten the market quite considerably and had expected as a bonus that we would get a rise in mortgage interest rates, we didn't. And 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 in homes.
INSKEEP: Do you believe that there was nothing that you could have done that could have prevented the housing bubble or could have brought it down a little more gently?
Mr. GREENSPAN: In the United States?
Mr. GREENSPAN: 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.
INSKEEP: If you'd jumped interest rates up to 10 percent or...
Mr. GREENSPAN: If it weren't ten percent, we'll go to 40 percent, and if not that, 80 percent. Short of that, the evidence is very clear that there was nothing that any central bank could have done or tried to do, because they realized the fact that they couldn't.
INSKEEP: Does that mean that a hard landing, which we seem to be experiencing now, was inevitable?
Mr. GREENSPAN: It 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 and undermining those bubbles. Eventually this has to diffuse itself.
INSKEEP: But is it more than housing that you're thinking about here? You're thinking about...
Mr. GREENSPAN: Oh, no, no. At the moment it's a housing deflation, and it's all over the world. I mean, it's starting in Spain, in Britain and a whole series of other countries for the same reasons. And this was clearly going to be impacting the economies of the world.
Mr. GREENSPAN: It's too soon to say, but the odds are clearly rising.
INSKEEP: Is there a statistic that causes you to think the odds are rising, or a particular behavior?
Mr. GREENSPAN: Oh yes, oh sure. The slowdown in the rate of economic growth were getting close to stall speed, and we are far more vulnerable at levels where growth is so slow than we would be otherwise. And indeed if 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.
INSKEEP: Alan Greenspan, thanks for coming by.
Mr. GREENSPAN: It's been my pleasure.
INSKEEP: Alan Greenspan is former chairman of the Federal Reserve. He's the author of the recently released book "The Age of Turbulence." And you can hear more of our conversation at the end of this year when he's part of our series of conversations we call The Long View. There's also more Alan Greenspan at the Web site, npr.org.
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