CNBC Press Releases

BARTIROMO: THOSE GLOBAL FORCES YOU MENTION ARE OBVIOUSLY INCREDIBLYPOWERFUL. I KNOW YOU WROTE THAT IN THE BOOK AND WE TALKED ABOUT THAT BEFORE, BUT IT'S HARD FOR SOMEONE WATCHING TO BUY INTO WELL, I HAD VERY LITTLE TO DO WITH THIS GIVEN THEY WATCHED YOU OVER THE LAST TWO DECADES AND DO SUCH A GOOD JOB, BUT LET ME ASK TO YOU LOOK BACK AT THE POLICY DECISIONS YOU MADE IN THOSE PERIODS. CUTTING INTEREST RATES FROM 01 TO 03. CAN YOU LOOK BACK AND HAVE NOW THAT YOU HAVE 20-20 HINDSIGHT AND SAY I SHOULD HAVE HAD THIS DIFFERENTLY. WHAT DO YOU REGRET, SIR?

GREENSPAN: WE HAVE TO DIFFERENTIATE BETWEEN WHAT THE POLICY WAS AT THE TIME AND WHETHER IT WAS A RATIONALLY CONSTRUCTIVELY POLICY BASED ON THE EVIDENCE OF THAT TIME. I HAVE SAID TO MANY QUESTIONS OF THIS NATURE THAT I HAVE NO REGRETS ON ANY OF THE FEDERAL RESERVE POLICIES THAT WE INITIATED BECAUSE I THINK THEY WERE PROFESSIONALLY DONE AND AS A CONSEQUENCE, CLEARLY WITH OUR ANTICIPATIONS OF WHAT WOULD HAPPEN AS A CONSEQUENCE WERE OFF, BUT THERE IS NO WAY OF AVOIDING THAT .IF WE CAN GET FORECASTS RIGHT 60% OF THE TIME, WE ARE DOING EXTRAORDINARILY WELL. IN RETROSPECT, DO I THINK IT WOULD HAVE BEEN IF WE HAD A HIGHER RECORD OF FORECASTING ACCURACY? OF COURSE. DO I THINK IT'S POSSIBLE? NO. DO I THINK WE COULD HAVE HAD BETTER? I DON'T THINK HUMAN NATURE IS SUCH THAT WE ARE GIVEN INSIGHT THAT ENABLES US TO DO THAT. WHAT I AM CONCERNED ABOUT IS BASICALLY THE ECONOMIC ANALYSIS INVOLVED IN SAYING THE FEDERAL RESERVE IS RESPONSIBLE FOR THE HOUSING BUBBLE. WE LOST CONTROL OF THE LONG END OF THE BOND MARKET PROBABLY SOMETIME AROUND 2002 OR 2003 AS GLOBAL FORCES BEGAN TO DOMINATE THE MARKET AND AS I SAID IN MANY OCCASIONS, THERE IS OVER $100 TRILLION OF ARBITRAGE OF THE LONG-TERM ASSETS OUT THERE. THE FEDERAL RESERVE THAT LOST ITS ABILITY TO INFLUENCE LONG-TERM RATES SEVERAL YEARS AGO AND INDEED THE FAILURE IN 2004 IS WHAT I CALL A CONUNDRUM WHOSE EXPIRATION OF THE CONSEQUENCE OF THAT IS BASICALLY THAT CENTRAL BANKS NO LONGER HAVE THE CAPABILITY TO DO VERY MUCH IN THE LONG END OF THE MARKET. WE TRIED AND WE FAILED AND BELIEVE I HAVE SPOKEN TO OTHER CENTRAL BANKERS IN RECENT YEARS AND THEY AGREE WITH THAT PROPOSITION.

LIESMAN: DR. GREENSPAN, YOU CONTROLLEDTHE SHORT END AND THAT WAS USED FOR THE ADJUSTABLE RATE MORTGAGES AND IT SEEMS LIKE YOU WERE ARGUING IN YOUR LAST ANSWER THAT LOW RATES DID NOT ACTUALLY SPUR DEMAND WHEN LOWERING RATES WAS THE REASON WHY YOU LOWERED RATES TO SPUR HOUSING DEMAND.

GREENSPAN: BASICALLY THE REASON THAT WE WERE LOWERING RATES WAS NOT TO SPUR HOUSING DEMAND AND INDEED IT WAS ALREADY BEING SPURRED BY THE FACT THAT LONG-TERM RATES WHICH IS THE DRIVER OF HOUSING WERE LOW. THIS WAS ESSENTIALLY TO CREATE LIQUIDITY IN THE SYSTEM TO CONFRONT WHICH WE PERCEIVE TO BE AN INCREASINGLY CORROSIVE PROBABILITY OF DEFLATION. VERY MUCH EXISTED IN JAPAN AT THE TIME. YOU MAY RECALL LEADING UP TO SHORT-TERM RATES WAS A FALL IN THE RATE OF INFLATION AND I FRANKLY NEVER PERCEIVED THAT THERE WAS SUCH A POSSIBILITY THAT YOU COULD HAVE A CURRENCY AND DEFLATION. THE JAPANESE PROVED US WRONG. I MUST SAY IT WAS AN EXTRAORDINARY SURPRISE TO ME. WHEN WE WERE EXHIBITING SIMILAR SIGNS, EVEN THOUGH OUR FORECAST IS THAT WE WOULD NOT GO IN TO A SIGNIFICANT DEFLATION OR EVEN MAJOR DISINFLATION, THE CONSEQUENCES IN OUR JUDGMENT AT THE FED WERE SO GREAT THAT WE DECIDED THAT WE NEEDED TO TAKE OUT INSURANCE AGAINST BELOW A 50-50 PROBABILITY.

LIESMAN: I WOULD LIKE TO MOVE DR. GREENSPAN ABOUT THE DEBATE ABOUT THE FUTURE.THE FEDERAL RESERVE IN ITS MINUTES SAYING THE CONTRACTION IN THE FIRST HALF OF 08 AND MEN FED MEMBERS WORRYING ABOUT A SEVERE AND PROTRACTED OUT COME FROM WHAT IS CURRENTLY IN THE FORECAST. DO YOU CONCUR WITH THOSE CONCERNS?

GREENSPAN: I DON'T THINK YOU CAN TELL AT THIS STAGE.THE REASON IS WE HAVE NOT CONFRONTED A SITUATION LIKE THISIN OVER A HALF CENTURY. WE DON'T KNOW THE DYNAMICS OF HOW IT OPERATES BECAUSE WE HAVE NO REAL INFORMATION.WHAT WE ARE LOOKING AT IS BASICALLY A TUG OF WAR BETWEEN THE REAL ECONOMY, BOTH IN THE UNITED STATES AND THE REST OF THE WORLD AND THE FINANCIAL SYSTEMS SINCE LAST AUGUST 9. WE STARTED OFF BACK THEN WITH ONE OF THE IMPORTANT CONSEQUENCES OF THE DECLINE IN LONG-TERM INTEREST RATES WITH THE ABILITY OF AMERICAN CORPORATIONS AND INDEED ALL OTHERS TO FUND THEIR SHORT-TERM LIABILITIES SIGNIFICANTLY REDUCE THEIR INTEREST COSTS AND BASICALLY HAVE NO REAL PRESSURESON THE NEED FOR FUNDS.INDEED PRIOR TO AUGUST 9 AND FOR A GOOD DEAL OF TIME THERE AFTER, ONE OF THE FASCINATING SIGNS ABOUT THE LACK OF NEED OF BORROWING ON THE PART OF THE BUSINESS SECTOR WAS THIS EXTRAORDINARY RISE IN BUY BACKS.IT'S NEARLY THE EXCESS CASH THAT WAS EMERGING WAS BEING USED AS A VERY DRAMATIC SOURCE OF SPENDING SINCE THEY PUT IT THAT WAY.AS A RESULT OF THAT, WHAT WE ARE DEALING WITH HERE IS A SITUATION IN WHICH THE PRESSURES OF THE FINANCIAL SYSTEM OF GRADUALLY PRESSING DOWN AND HAVE BEEN, BUT REMEMBER THAT CASH FLOWS HAVE BEEN STRONG IN THE CORPORATE SECTOR LARGELY AS YOUR GUEST JUST RECENTLY MENTIONED. THEY ARE SIGNIFICANT PARTS OF CORPORATE PROFITS AND EARNINGS AND ANOTHER PART IS THE PROFITS COMING FROM THE EXPORT MARKETS.

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