Former Fed Chairman on 60 Minutes

It is better to be thought an economic genius and steer away from 60 minutes than agree to an interview and damage the illusion. In an excerpt from an upcoming interview, the former Federal Reserve Chairman Alan Greenspan stated he was aware of "subprime" lending practices where homebuyers got very low initial rates only to see them later jacked up, causing severe payment shock. But he said he didn't initially realize the harm they could do.

"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," he said during CBS "60 Minutes" interview, "I really didn't get it until very late in 2005 and 2006." He went on to acknowledge his failure to see early on that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy.

A meltdown in the "subprime" mortgage market has rocked Wall Street and Main Street. Foreclosures and late payments have soared, and lenders have gone out of business. Some economist believe this has increased chances the economy might slide into a recession this year.

The late Edward Gramlich, a former Federal Reserve Board governor, had raised a red flag about questionable lending practices. However, Greenspan maintained there was little the Fed could do about the "subprime" situation. This is interesting considering one of the duties of the Fed is to oversee the regulation of banks and consumer-protection laws. Greenspan's statements are even harder to believe considering he had warnings about the "subprime" phenomenon.

In 2000, Gramlich, concerned that states were letting questionable lending practices flourish, proposed expanding the Fed's oversight to some mortgage lenders that weren't banks. But Chairman Alan Greenspan rebuffed him. (Mr. Greenspan has said he doesn't recall the exchange but doesn't dispute it.)

Alan Greenspan, who ran the central bank for more than 18 years was known as an amazing theoretician. His comments had pundits parsing his every word in an attempt to decipher his real meaning. Once addressing the importance of learning math to daily life, Greenspan stated:

It has been my experience that competency in mathematics, both in numerical manipulations and in understanding its conceptual foundations, enhances a person's ability to handle the more ambiguous and qualitative relationships that dominate our day-to-day financial decision-making.

A BusinessWeek article, "Is A Housing Bubble About To Burst?"-July 19, 2004, stated: "It was the Federal Reserve-engineered decline in rates that inflated the housing bubble ... the most troublesome aspect of the price run-up is that many recent buyers are squeezing into houses that they can barely afford by taking advantage of the lower rates available from adjustable-rate mortgages. That leaves them fully exposed to rising rates."

So the question is how could Greenspan not realize that banks and mortgage companies lending large sums of money, at variable interest rates, to people with poor or bad credit, unverifiable employment histories and minimal financial savvy could be a good thing with no long term economic implications? Perhaps we will have to wait for his much anticipated book.

Greenspan will continue to be highly regarded by the entire political spectrum, most economists and corporate America as one the best Fed Chairman in U.S. History. His entire 18 year tenure taken as a whole certainly supports this belief. However, his lassie fareattitude toward "subprime" lending combined with warnings from within his own inner sanctum (The Board of Governors) leads one to wonder if the emperor wasn't aware he had on no clothes or simply enjoyed his nakedness.