Greenspan admits he was slow to pick up on sub-prime dangers

By David Usborne in New York
Published: 15 September 2007

It is not quite a mea culpa, but Alan Greenspan is now admitting that he was aware that the successive interest cuts under his stewardship of the Federal Reserve were encouraging an explosion in sub-prime lending but that he was slow in realising the dangers that the trend carried for the economy.

He makes the confession in an interview with the CBS current affairs programme 60 Minutes, to be broadcast in the United States tomorrow evening.

Mr Greenspan, 81, agreed to appear to help promote his long-awaited book, The Age of Turbulence, being released on Monday. Instead, his comments are likely to spark fresh criticism of his actions at the tail end of his 18-year tenure as Fed chairman, when he repeatedly lowered interest rates, glutting the market with cheap credit and encouraging lenders to offer loans to homebuyers and investors at rock-bottom adjustable rates. Their sudden spiking has triggered today's worldwide credit crisis and threatens to tip the US into recession.

His successor, Ben Bernanke, is widely expected once again to loosen monetary policy with a rate cut next Tuesday, perhaps of a quarter point or even more.

According to excerpts released by CBS, Mr Greenspan will concede that he "didn't really get it" with regard to sub-prime lending and the risks it presented until too late. He argues, however, that there was little the bank could have done, and that the policy of lowered rates was still correct.

"While I was aware of a lot of these practices going on, I had no notion of how significant they had become until very late," he tells Leslie Stahl. "I really didn't get it until very late in 2005 and 2006."

Even then, however, options were not available to him to nip it in the bud. "It was nothing to look into particularly, because we knew there were a number of such practices going on, but it's very difficult for banking regulators to deal with that," he asserts.

Nor is he sympathetic with critics, and indeed some ex-colleagues from the reserve, who now suggest that he kept American rates too low for too long. "They are mistaken," he tells the interviewer. "It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low."

Mr Greenspan, who served four different presidents as chairman of the Fed before retiring last year, avoids trying to second-guess the policies of Mr Bernanke in retaining much higher lending rates until now, acknowledging that the conditions have been less favourable than earlier in the decade. "We're dealing in an environmental back there where inflation was easing," he says. "We could have acted without fear of stoking inflationary pressures. You can't do that any more."

As for Mr Bernanke, he concludes, he has, "been doing an excellent job".