WASHINGTON – For 18 1/2 years as Federal Reserve chairman, he was celebrated for helping drive a robust U.S. economy. Yet in the years after he stepped down in 2006, he was engulfed by accusations that he helped cause the 2008 financial crisis – the worst since the 1930s.
Now, Alan Greenspan has struck back at any notion that he – or anyone – could have known how or when to defuse the threats that triggered the crisis. He argues in a new book, “The Map and the Territory,” that traditional economic forecasting is no match for the irrational risk-taking that can inflate catastrophic price bubbles in assets like homes or tech stocks.
In an interview Sunday, Greenspan reflected on his book, his Fed tenure and the risks that still endanger the financial system.
Greenspan, 87, acknowledged some errors of judgment as Fed chair. But he said he saw no reason to downgrade his own assessment of his tenure.
“Our record was fairly good,” he said.
Here are excerpts of the Greenspan interview, edited for length and clarity:
Q. You write that you were shaken by the 2008 financial crisis because of the failure of one of the pillars of a stable financial market: “rational financial risk management.” What did you discover in your research for the book about this issue?
A. Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.
Q. With the knowledge you gained from the financial crisis, has it changed your own assessment of how well you performed as Fed chairman?
A. The real question is, should I have done something different? And the answer to that question is no. Did we make mistakes? You bet we made mistakes. But I thought our record was fairly good. Remember, we stepped in, probably at just the right time after Oct. 19, 1987, when the market went down 22 percent. It was pretty rocky for a while, but I thought we maneuvered that better than I expected we would be able to do. There were a lot of things of that nature where I thought we did well. And there were other things we didn’t do well.
Q. A lot of criticism centers around the failure of the Fed and other regulators to deal with the explosion of subprime mortgages, which were packaged into securities that then turned bad and were at the center of the troubles. Should the Fed have handled subprime mortgage regulation differently?
A. The problem is that we didn’t know about it. It was a big surprise to me how big the subprime market had gotten by 2005. I was told very little of the problems were under Fed supervision. But still, if we had seen something big, we would have made a big fuss about it. But we didn’t. We were wrong. Could we have caught it? I don’t know.
Q. You’re famous for your love of delving into the minute detail of economic statistics to help track the economy. One of your favorite statistics has been railroad boxcar loadings of autos and other manufactured goods. Are you still following that type of information?
A. Let me put it this way: When (the federal government) stopped publishing data a couple of weeks ago, one thing I had to tell what was going on with the economy was car loadings.