Sept. 18: ‘We’ve had a bubble in housing,’ Greenspan says in interview on this date in 2007


(Photo credit: Nathan Jongewaard, Flickr)

Six years ago today, on Sept. 18, 2007, PBS aired a "NewsHour With Jim Lehrer" interview with former Federal Reserve Chairman Alan Greenspan. Lehrer asked: "Looking back, do you think there is something that could have been done on your watch as chairman of the Fed" to prevent the subprime mortgage crisis?

"I don't think so," Greenspan replied. Instead, he blamed "the innate characteristics of human nature" and how people react "after a period of exuberance."

"The problem is that we've had a bubble in housing," he said -- a bubble with roots in the end of the Cold War. As a billion people who had been behind the Iron Curtain quietly abandoned central planning, he said, the improving economics led to "a very major decline in long-term interest rates around the world. In every major country, housing prices went up very sharply."

Lehrer: "Because interest rates were down, it was easier to buy a house?"

Greenspan: "Absolutely."

Lehrer: "And the market boomed."

Greenspan: "And the market boomed."

Lehrer: "It boomed too much?"

Greenspan: "Well, yes, I think it did boom too much."

When Lehrer asked whether Greenspan feels responsible for having kept interest rates low, Greenspan replied:

"We had no choice. I mean, we're the vaunted Federal Reserve, but this global force was suppressing us. We actually tried in 2004 to get mortgage interest rates up and to put some sort of clamp on the extent of the housing boom, and we failed, because usually when we move short-term interest rates up, which is what the Federal Reserve does, long-term rates go with it. It didn't this time. ... We and, in fact, every other central bank could not confront this issue.

"And what I'm increasingly beginning to conclude is, when you get bubbles like this, there is no way of diffusing them until the speculative fever breaks on its own. We tried numbers of things, and other people tried numbers of things.

"But what is different about the United States is, when our bubble burst, housing prices started down. Our actual rise in prices is probably a little below average around the world. But we, as a consequence of having a major thrust in trying to increase homeownership in this country, developed properly, in my view, subprime mortgages so a lot of people who would not otherwise be able to own a home were able to own a home."

Then their interest rates rose, Lehrer said, and "that's when they got hurt, right?"

Greenspan answers: "Well, the real problem began because a very significant proportion of those loans were on terms which shouldn't have been made. In many cases, I think it was fraud and that ... the only area where I think more regulation is required in this country is addressing fraud, because fraud is destructive of markets, but more importantly it's destructive of families."

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