Former Fed Chairman Alan Greenspan speaks extensively to Maria Bartiromo

J. Scott Applewhite

On his last day as chairman of the Board of Governors of the Federal Reserve System, Alan Greenspan smiles as he presides over his final Federal Open Market Committee meeting at the the Fed's headquarters in Washington, Tuesday, Jan. 31, 2006. He is speaking to Deborah J. Danker, at left, special assistant to the board, with Vice Chairman Roger W. Ferguson Jr., at right. Greenspan has held the post for more than 18 years and is widely viewed as the most successful chairman in the Fed's 92-year h

ENGLEWOOD CLIFFS, N.J., September 17, 2007-CNBC, First in Business Worldwide, presents an extensive interview with former Federal Reserve Chairman Alan Greenspan-arguably the most important central banker of modern times. In excerpts of the interview with CNBC's Maria Bartiromo, which will air through the day on CNBC, Greenspan discusses the state of the world economy, whether interest rates were kept too low for too long, the state of the subprime, and presidential politics.

Below are excerpts of the interview, which will air all day on CNBC. The excerpts began airing on "Squawk Box" (6-9 AM ET) and will be aired on "Squawk on the Street" (9-11 AM), "The Call" (11-Noon), "Power Lunch" (Noon-2 PM), "Street Signs" (2-3 PM), "Closing Bell" (3-5 PM), "Kudlow & Company" (5-6 PM), "On the Money" (7-8 PM) and "Fast Money" (8-9 PM).

This will be followed by "Greenspan: Power, Money & The American Dream," tonight, September 17th at 9PM & 12AM ET. The program is reported by CNBC's Maria Bartiromo.

Below are the excerpts:

MARIA BARTIROMO:
Are-- are we going to see then a contagion (?) in Europe and Asia of what we're seeing here in the U.S.?

ALAN GREENSPAN:
In-- in what sense/

MARIA BARTIROMO:
Housing slow down?

ALAN GREENSPAN:
Well, okay.

MARIA BARTIROMO:
Bad loans with the financials holding the bag?

ALAN GREENSPAN
That's-- precisely the question that everyone's asking. We unlike the rest of the world-- are showing some now modest price decline. And my concern is that it can get-- can get quite a good deal larger. It's not showing up in the other parts. In other words, Britain has had a much bigger residential price boom than we. Australia has. Spain has. There are, in fact, 20 countries which the economists-- observes and monitors-- quarterly on house price changes, and the boom has been worldwide and phenomenal. The United States is actually somewhere below average. But it's only here where we're beginning now to see some price declines.

There's been some-- not-- some-- I shouldn't say that it's not been anywhere else. But the real concern is here. It's not been in Britain. It's not been Australia. In fact, prices went down, then they started back up. And everyone is wondering which is the right model? Is it-- or the one that is gonna prevail, whether it is ours? Or, is it gonna be that the result of these big-- bubbles in housing that prices go up, but instead of going down, they just flatten out.

MARIA BARTIROMO
It doesn't sound like you think there's gonna be a contagion.

ALAN GREENSPAN:
Well, the problem is, is that-- we haven't seen one yet. I don't know. But I will say it's the critical question.

Squawk On The Street (9am ET)

MARIA BARTIROMO:
I get it. I get it. But does anything today feel like '87? The spring or the summer of '87?

ALAN GREENSPAN:
Oh, sure. But not-- not-- that-- to that extent. One of the things I've become increasingly aware of is-- very early in my career I was involved with the-- what we then called "mathematical statistics," which evolved into econometrics. And, indeed, one of my early professors was Paul Wolfowitz's (PH) father at Columbia, when I was at Columbia.

And-- I've been developing econometric models for years. And what's becoming increasingly clear to me is that we model our-- economies, and we include both the downside and the upside of economies. But I'm becoming increasingly-- wondering whether we actually have two wholly different types of phenomenon? That is one driven by increasing exuberance as markets evolve, and then the other by fear. Both innate, unchangeable characteristics of human nature. And the fear part of it seems to behave similarly in all cases. And it always is a disengagement. Remember when-- if people are frightened or uncertain, they try to get away from things. They disengage.

Squawk On The Street (10:40am ET)

MARIA BARTIROMO:
Is there too much leverage? Too-- too much use of derivatives?

ALAN GREENSPAN:
No. It's-- the answer is it depends. I mean, for example, I've always-- argued that, say, credit default swaps have been an extraordinarily valuable tool in the sense a substantial proportion of loans that are made, are made by leveraged institutions. And in previous decades, they left those loans on their balance sheets. And when there was stress, they had a banking crises. Or you had Savings and Loans crisis, or something of that nature.

With the credit default swap you have the originators of loans capable of selling off the credit risk to those with far less leverage, who are willing to accept the risk at a price. And-- since we've had credit default swaps, there has not been a major financial institution undermined.

And I think it's been an-- an extraordinary advance. And the way you can tell it's useful is look at the notional (?) values of-- CDS and it's just has gone through the roof. There are very serious questions currently about a lot of the structured products that-- have gotten so sophisticated and so technical, and so-- driven and priced by internal models as distinct from market prices that I think in certain areas we have-- we have gone too far. The market will straighten it out. In other words, when this particular episode is over, and it will be over at some point-- we're gonna find that certain-- products which had a-- a terrific vogue during the period, but were found to be very difficult to price-- will probably shrink in-- in size. They may not disappear, but-- their orders of magnitude will come down quite significantly.

The Call (11:00 am ET)

MARIA BARTIROMO:
Hank Paulson (PH) said just the other day that this is gonna be a worse slow down than past crises. You agree?

ALAN GREENSPAN:
Well-- it-- it needn't be in the sense the actual-- financial-- problems are very similar to those which I've seen-- over the decades. These are-- they repeat almost exactly in certain respects because they reflect an innate aspect of human nature, which we call "fear." And there's nothing more debilitating to a financial market than people who are frightened, because it freezes up everything.

The problem that's different now is the issue which I mentioned before, namely that it's partly been triggered by the home price-- potential decline. And we, unlike a lot countries-- have a-- a very significant wealth effect in our consumer markets. And the federal reserves' system and analysis indicated that-- as I recall roughly 85 percent of consumption is financed by income. But the other 15 percent is essentially a reflection of the wealth that gets accumulated, financed, I might say, usually the mortgage market.

A good part of what has been going on in recent years has been the mortgager market financing consumer markets. And what we have not seen, although-- the-- the data on Friday-- do suggest that we may be slowing down-- personal consumption expenditures finally. That's what the critical issue here, which differentiates this from 1998 to 19987.

And-- it's conceivable that we-- will get a slowing. Indeed, it seems we're-- we already getting a slowing. But-- it's-- that is more a cyclical effect, which could have occurred even if we didn't have this sub-prime asset backed problem, which is-- well, to the shock of most everybody, spread all over the world. Nobody holds sub-prime mortgages other than the United States. Everyone seems to have bought-- asset backed sub-primes with not very happy outcomes.

Power Lunch (12:00 pm ET)

MARIA BARTIROMO:
All of these important economic events you are overseeing the most important institution, and leading things. And then not only are you dealing with these crises, but then you've got to convey what's going on to people. That means Congress, the president, the media, the public. So what? You come up with Green speak.

ALAN GREENSPAN:
Otherwise known as known as Fed speak.

MARIA BARTIROMO:
What is it?

ALAN GREENSPAN:
It's a-- a language of purposeful obfuscation to avoid certain questions coming up, which you know you can't answer, and saying-- "I will not answer or basically no comment is, in fact, an answer." So, you end up with when, say, a Congressman asks you a question, and don't wanna say, "No comment," or "I won't answer," or something like that. So, I proceed with four or five sentences which get increasingly obscure. The Congressman thinks I answered the question and goes onto the next one.

Power Lunch (12:00 pm ET)

MARIA BARTIROMO:
What is this war about?

ALAN GREENSPAN:
What it was about is I was always of the opinion that Saddam Hussein was on a very dangerous path. You'd watch what he was doing in the 30 years he was confronting Iran, and invading Kuwait. Was threatening Saudi Arabia.

And it was very evident to me that his goal was the Straights of Hormoz (PH), which is where 17, 18, 19 million barrels a day of the world's crude oil-- goes out to the markets. Anyone who controls the Straights of Hormoz can shut down the industrial structure of the West. And I always was very much concerned about that. My view was taking out Saddam Hussein was a very important thing. So, I-- my view of-- of the-- the war was, yes, it was about oil. But-- and-- and I thought that there were ma-- weapons of mass destruction, and-- Hussein was behaving as though there were, and-- you know--

MARIA BARTIROMO:
And meanwhile here we are with $80 a barrel oil.

ALAN GREENSPAN:
Yeah.

MARIA BARTIROMO:
Doesn't that concern you?

ALAN GREENSPAN:
Yeah. Of course it does. And it's precisely for that reason that-- it was important to get him out. I was never of the opinion that the reason should be-- weapons of mass destruction. And more importantly-- I had no reason to disbelieve that that, indeed, was our official motive and the reason why we went to war. But my-- I never thought that was a terribly critical issue. But-- I applauded-- taking Saddam out. I thought it was a very important issue. And-- this problem still exists.

Street Signs (2:00 pm ET)

MARIA BARTIROMO:
let me get your reaction to some of the sort of critics out there, who will say, "Look, the interest rates were way too low for-- for way too long. And easy money encouraged people to take on all this debt. Get in over their heads. Encourage mortgage companies to come out with all this risky stuff." Did you keep rates too low for too long?

ALAN GREENSPAN:
The markets did.... starting in the early 1990s you could see the, what I called, creeping capitalism really accelerate. And the way you knew that, for example, is foreign direct investment, which had been actually prohibited before 1980, and got up to only $4 billion in 1991. Then went straight up. And it's been recently more $70 billion a year.

Now the reason this is important is that it means that a large number of very sophisticated investors are putting money in China believing that they're going to get it back, which means they believe the property rights, as weak as they are statutorily in China, are firm. And-- what's happened clearly as a consequence of this is, you remember the old Asian tiger's model where they-- imported large tec-- a large amount of-- developed world technology.

Joined it with low cost, but well educated-- work forces, and created a huge export boom, which raised in Korea and Taiwan and all, their standards of living rose dramatically. Same thing happened in China. You get this huge amount of exports and as the-- controlled, but still significant flows of workers from the provinces move down to the Pearl River Delta, where the export zones are, what you basically get as a consequence of that is a huge export market, which is evolving, still increasing.

The effect was twofold. It flattened the rate of increase in unit labor costs in the developed world. But more importantly, remember that these export markets really moved higher in developing nations who chronically save far more than the developed world.

So, even if everybody's propensity to save remains the same, if you move a very large part of the world income to these developing nations, which is exactly what's been happening, excess savings is created and it is that which has engendered a very dramatic decline in long term interest rates.

Closing Bell 3 (3:00 pm)

MARIA BARTIROMO:
you have said over-- I think I read it over the last couple of weeks, that you saw late in the cycle that people were borrowing so much, and companies were coming out with all these risky loans. Do you wish you put out more warning signals when that was happening?

ALAN GREENSPAN:
Well-- you're talking about the sub-prime issue basically? It's only fairly recently that we've had full data on sub-prime originations, because we didn't. A lot of the private agencies began to develop data. And I was-- really quite surprised at some of the early numbers on estimates of the proportion of total mortgage originations that were sub-prime. Remember, I'm working at this-- at this point-- with my colleague, Jim Kennedy, at the Fed in developing a very big mortgage market analysis. And-- you would think I'd be acutely aware, but there were no such data at the time, at least that I was aware of. So, I did not become aware of some of the sign-- we knew that-- well, first of all, we knew the sub-prime market was having difficulties.

And there were a very significant number of-- unscrupulous people going out and ma-- making-- loans. But we thought that the level did not research-- macro economic concerns. It was a very important concern for a lot of people.

And I've always been a supporter of sub-prime loans, because I, as I say in the book, believe that when you're dealing with a major capitalist economy, you want the largest number of people you can get to own property. And it was important to me knowing that you're dealing with-- risky assets, to get as much home ownership as you can get. So, there was a great deal of concern about individual families who were gonna be running and mo-- run into trouble, losing their homes and the like. But it never got to the level of a macro economic issue, until all of a sudden I saw some estimates of the proportion of total mortgage origination sub-prime at 20 percent.

I said, that's nonsense. There is no such possibility. They couldn't be that large. But, indeed, they were. And-- we got up to in-- last year to-- 600 billion in originations and sub-prime loans, which is a number which would have dwarfed the original whole mortgage market-- only a relatively few years earlier.

MARIA BARTIROMO:
Is it fair to say that because real estate and housing has become such a big part of the economy now, and now in the fourth quarter you've got those rates resetting again, that that is going to slow down things much more?

ALAN GREENSPAN:
Well, to the extent that-- you get an unwinding of the type credit spreads, which are-- been prolongs. In fact, you know, I said in 2005 that I said history does not deal kindly with protracted periods of low credit spreads, meaning under priced-- risk.

What the sub-prime thing actually did was opened up the credit spreads and created-- much higher rates of interest for less than investment grade-- companies and the like. And-- that will of necessity slow down some of the activity that's been going on. And most everybody is taking their forecasts down as such.

But-- at the time-- the attack (?) never looked large enough to be something which came above the radar screens. Would I have said something if had seen the numbers? Of course. But-- I don't know why I didn't see them. I know that they weren't officially available, because the Hunda (PH) data, that is the Mortgage Data Disclosure Act-- system is always a couple of years behind, so you don't-- you don't see that stuff. But-- the private organizations were beginning to collect the data in a way. And it took a while for it to come out.

MARIA BARTIROMO:

Is it fair to say that because real estate and housing has become such a big part of the economy now, and now in the fourth quarter you've got those rates resetting again, that that is going to slow down things much more?

ALAN GREENSPAN:

Well, to the extent that-- you get an unwinding of the type credit spreads, which are-- been prolongs. In fact, you know, I said in 2005 that I said history does not deal kindly with protracted periods of low credit spreads, meaning under priced-- risk.

What the sub-prime thing actually did was opened up the credit spreads and created-- much higher rates of interest for less than investment grade-- companies and the like. And-- that will of necessity slow down some of the activity that's been going on. And most everybody is taking their forecasts down as such.

But-- at the time-- the attack (?) never looked large enough to be something which came above the radar screens. Would I have said something if had seen the numbers? Of course. But-- I don't know why I didn't see them. I know that they weren't officially available, because the Hunda (PH) data, that is the Mortgage Data Disclosure Act-- system is always a couple of years behind, so you don't-- you don't see that stuff. But-- the private organizations were beginning to collect the data in a way. And it took a while for it to come out.

Closing Bell (4:00 pm ET)

MARIA BARTIROMO:
I read-- I read in the book that at one point you were getting 25 cents allowance a week. I mean-

ALAN GREENSPAN:
That was big stuff then. Remember we were talking about silver quarters.

MARIA BARTIROMO:
You ever looked back at this incredible career you've had, and remember where you came from and just say, "Wow."

ALAN GREENSPAN:
I'd say, "Wow, wow.

MARIA BARTIROMO:
How does it feel? How did this happen?

ALAN GREENSPAN:
Well-- you know, you make a lot of-- key decisions-- and you get a lot of luck. I mean, the most important economic decision that I made was making what was then a very profound decision for me to leave the music business. I was a professional musician. I was a reasonably good amateur, but I realized that I was an average professional.

And that convinced me that I better look for a different profession. And-- that was a critical decision that set me on the road-- in economics.

Kudlow & Co. (5:00 pm ET)

MARIA BARTIROMO:
Four presidents you served under. You counseled five. Who was your favorite?

ALAN GREENSPAN:
Gerald Ford.

MARIA BARTIROMO:
Why?

ALAN GREENSPAN:
Unlike any public figure I had ever met, this man had character. I mean his word was-- absolute. He was not hung up with all sorts of neuroses, which are so prevalent in government. And he was a very decent man. In fact, there was one episode which sort of characterizes it.

I came into him-- once and was-- was sitting in the Oval Office, and I was explaining a certain policy which I thought ought to be implemented. He said, "That's very interesting. I think we're gonna try to do that." Two weeks later he calls me back, and he said, "Come down." So, I went over to the Oval Office. And he said-- "I'm having political trouble getting this particular initiative through. I want you to know that I've tried, but I've not been able to do it."

And I said to him, "Mr. President, you're president of the United States. I'm an aide. You don't have to apologize to me." It's extraordinary what it is to work for a man like that. And what's fascinating is there is-- for years and years there was an annual reunion of people who formerly worked in the Ford administration.

And that-- the number of people who showed up increased every year. And I say, now wait a second. How are there now more people-- every year who worked in the Ford administration? And the reason is the affection for that man personally was just unending.

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