Greenspan: Fed Couldn't Stop Housing Bubble
The Federal Reserve tried to curb the explosive growth in the U.S. housing sector under Alan Greenspan's tenure, but each time it tried to raise long-term interest rates it failed, the former Fed chief said.
"In 2004 we tried to raise mortgage rates by moving the 10-year Treasury note up and we failed," Greenspan told CNBC, adding that the Fed failed again in 2005 and would have failed had it tried in 2002.
"We had no control, that I could see, which would have made any difference in the extent of the bubble that was emerging," he said. "And we concluded, as we did with respect to the stock market bubble in the 1990s, that … as I pointed out previously, every time we tried to tighten … we weren't trying to knock the stock market down. We were reacting to inflationary pressures.
Greenspan denied that the Fed inflated the economy under his leadership, saying that rate policy was reacting to price pressure.
"What we were responding to was global forces which every central bank was responding to," he said. "We had a continual, gradual decline in the rate of inflation. And, indeed, we were acutely aware that there are downsides to that, as well as upsides.
"The upsides were … world economic growth of unprecedented order. Hundreds of millions of people coming out of extreme poverty. And there are all sorts of plusses to it," Greenspan said. "But there are downsides. And the downsides are what we're experiencing in bubbles."
Possibility of Recession
On the possibility of the U.S. economy moving into a recession, Greenspan said. "the risks are probably, obviously larger now than back" in January, when he estimated a 1/3rd chance, but "not a great deal."
And Greenspan stressed that while current Fed Chief Ben Bernanke faces some of the same problems he did as chairman -- such as fear causing investors to disengage from the market -- Bernanke is facing a much tougher inflationary picture.
"We had the ability and flexibility if you so chose, to move (interest rates) down without worrying about the significant increases that may occur," Greenspan said. "It's different now. And it's very clear that the tradeoffs on inflation and growth are altered. And the Fed has to be far more careful about inflation now than when I was chairman."
The Federal Open Market Committee meets on rates Tuesday, with many in the market pushing for Bernanke to cut the fed funds rate by half a point.
Growth vs. Inflation
Greenspan said the economy still appears to be in a disinflationary mode, but there are signs in labor costs that inflationary pressures are starting to emerge.
"I'm saying that inflationary pressures will build up," he added. "And when I put the numbers together, we get, as I say, (interest rates on the 10-year Note) somewhere in the area of 8% or higher."
Greenspan also said an inflation target of 1% to 2% is unrealistic when the crutch of disinflation is gone.
"The Fed does have the capability of suppressing the type of inflation process which is going on," he said. "The difficulty is it will require very significantly higher interest rates. And when Paul Volker successfully suppressed inflation in the early 1980s, he was vilified."