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CNBC Exclusive: CNBC's Maria Bartiromo Interviews Former Fed Chairman, Alan Greenspan, on "Closing Bell with Maria Bartiromo" (Transcript Included)

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
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

WHEN: Tuesday, April 8th at 4PM ET
WHERE: CNBC's "Closing Bell with Maria Bartiromo"

Following is an unofficial transcript of CNBC's EXCLUSIVE interview with Former Fed Chairman Alan Greenspan. In the interview with CNBC's Maria Bartiromo, Greenspan defend his legacy and discuss the state of the economy and the housing bubble, among other topics.

All references must be sourced to CNBC's "Closing Bell with Maria Bartiromo"

BARTIROMO: ALAN GREENSPAN WAS HAILED AS ONE OF THE CENTRAL BANKERS THAT EVER LIVED, RESPONDING QUICKLY TO THE STOCK MARKET CRASH OF 1987, RESTORING CONFIDENCE BY CUTTING INTEREST RATES AGGRESIVELY TO CURB RECESSION IN 2001. NOW CRITICS ARE BLAMING GREENSPAN FOR TODAY'S FINANCIAL CRISIS SAYING HE KEPT RATES TOO LOW FOR TOO LONG WITH TOO LITTLE REGULATION. HE IS JOINING US NOW TO SET THE RECORD STRAIGHT. STEVE LIESMAN IS WITH MR. GREENSPAN IN WASHINGTON. NICE TO HAVE YOU ON THE PROGRAM AND WELCOME BACK TO THE CLOSING BELL. YOU ARE PUTTING YOURSELF OUT THERE AND I SAW THE OP-ED IN THE FINANCIAL TIMES AND THE ARTICLE IN THE JOURNAL. LET ME GET YOU TO SET THE RECORDSTRAIGHT AND TELL ME HOW YOU FEEL OR WHAT YOU WOULD SAY TO THE CRITICISMS YOU SAY IN THE ARTICLE TODAY I WAS PRAISED FOR THINGS I DIDN'T DO AND I'M BLAMED FOR THINGS THAT I DIDN'T DO.

GREENSPAN: THAT IS FACTUALLY THE CASE.I SAID IN MY BOOK WHICH I WROTE AND PUBLISHED LAST SEPTEMBER THAT PEOPLE USED TO COME UP TO ME AND SAY THANK YOU FOR MY 401K AND I KEPT TRYING TO TELL THEM I HAD LITTLE TO DO WITH IT, IF ANY. INDEED THE MAJOR THRUST OF MY BOOK AND INDEED MY GENERAL COMMENTS HAS BEEN IT HAS BEEN GLOBAL FORCES WHICH AFFECTED EVERYBODY AND WE IN THE UNITED STATES HAVE BEEN THE GREATEST BENEFICIARIES. IF I CAN GO ON FURTHER --

BARTIROMO: PLEASE, GO AHEAD.

GREENSPAN: LOOK, AT THE MOMENT WE ARE LOOKING BACK AT A HISTORY IN WHICH MORE THAN TWO DOZEN ECONOMIES HAVE HAD HOUSING BUBBLES AND THEY ARE ALL RELATED THE BEST I CAN JUDGE STATISTICALLY TO THE DRAMATIC DECLINE IN REAL LONG-TERM INTEREST RATES THAT OCCURRED FROM THE EARLY 1990s FORWARD. INDEED THE DIFFERENCES BETWEEN THE VARIOUS COUNTRIES BUBBLES ARE NOT VERY GREAT AND THE UNITED STATES IS RIGHT IN THE MIDDLE. THE QUESTION ESSENTIALLY IS YOU CAN FULLY EXPLAIN THE BUBBLE IN TERMS OF WHAT HAS BEEN GOING ON GLOBALLY AND THE ARGUMENT THE INTEREST RATES ARE TOO LOW COULD BE A CREDIBLE ARGUMENT SINCE IT HAS BEEN PROPERLY ARGUED THAT ADJUSTABLE RATE MORTGAGES ARE LOWER AND THE VOLUMES OF ADJUSTABLE RATE MORTGAGES DID INCREASE THE THE CRITICAL QUESTION IS DID THAT INCREASE THE DEMAND FOR HOMES AND THEREFORE THE PRICE LEVEL ABOVE, OVER AND ABOVE WHAT WOULD HAVE OCCURRED FOR GLOBAL REASONS. AS BEST I CAN JUDGE BECAUSE THE CORRELATION BETWEEN HOME PRICES AND THE RATIO OF ADJUSTABLE RATE MORTGAGES TO TOTAL MORTGAGE ORIGINATIONS IS VERY WEAK AND WHAT THAT SUGGESTS IS THAT ADJUSTABLE RATE MORTGAGES THAT ROSE DID RISE IN THE EARLY PART OF THIS DECADE WERE LARGELY A MEANS OF FINANCING AS DISTINCT FROM AN ELEMENT PRESSING PRICES HIGHER AND WHAT IS FAIRLY CLEAR FROM THE DATA IS THAT IF ADJUSTABLE RATE MORTGAGES WERE NOT AVAILABLE, THE PURCHASES WOULD STILL HAVE OCCURRED, BUT FINANCE WOULD SLIGHTLY BE MORE COSTLY LONG-TERM RATES.

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.

BARTIROMO: PERHAPS, BUT NOW WE SEE THIS ENORMOUS NEED FOR CAPITAL ON THEPART OF OUR FINANCIAL INSTITUTIONS AND OUR VIEWERS ARETHINKING HOW TOUGH IS IT?HOW WORRIED SHOULD THEY BE? HOW CLOSE DO YOU THINK THE GLOBAL FINANCIAL SYSTEM CAME TO REALLY SEEING A HALT OR A SEIZURE IN THE LAST COUPLE OF WEEKS BEFORE THE BEAR STEARNS BAIL OUT?

GREENSPAN: I'M TALKING ABOUT THE NON-FINANCIAL SECTOR OF THE ECONOMY. IT STILL IS AN EXTRAORDINARY GOOD SHAPE AND WE'RE SEEING LITTLE IN THE WAY OF BORROWING REQUIREMENTS, BUT IT IS UNDER PRESSURE BASICALLY NOT BECAUSE OF THE BORROWING, BUT THE REVENUES ARE BEGINNING TO BECOMEDEPRESSED BY PRESSURE I SHOULD SAY. LARGELY BECAUSE THE CONSUMERS ARE BEGINNING TO SHRINK AND THE AUTOMOBILE MARKETS ARE CONTRACTING AND PRODUCTION IS BEGINNING TO EASE. WE ARE IN THE THROWS OF A RECESSION. SO THAT THE REAL PROBLEMS ARE OCCURRING BASICALLY FROM THE AREASASICALLY FROM THE AREAS AND SOURCES OF REVENUES. AT SOME POINT THIS TUG OF WAT IT WILL SOLVE THE FINANCIAL PROBLEM OR PULL DOWN THE REAL ECONOMY AND I DON'T THINK WE HAVE ENOUGH KNOWLEDGE OF HOW THIS SYSTEM WORKS TO MAKE THAT JUDGMENT DEFINITIVELY.

BARTIROMO: REAL QUICK ON THE FINANCIAL SERVICES COMPANIES, THAT'S WHEREI WAS FOCUSED, NOT ON THE NON-FINANCIAL.HOW WORRIED ARE YOU?

GREENSPAN: FOR THE FIRST TIME IN MY MEMORY THAT WE HAD BOTH THE BANKING SYSTEM AND THE SECURITIES MARKETS IN TROUBLE.HISTORICALLY IT WAS ONE OR THE OTHER AND WE FOUND THAT IN 1989 AND 1990 WHEN THE BANKS WERE UNDER SEVERE PRESSURE, THE WHOLE OPENING BEGAN AND THE INTERMEDIATION OF SAVINGS INTO INVESTMENT WAS FACILITATED BY THE SECURITIES MARKETS. OTHER TIMES WHEN THE MARKETS WERE THERE, THE BANKS WERE VIABLE. THIS IS THE FIRST TIME WHEN BOTH WERE UNDER PRESSURE AND AT THIS STAGE, IT'S EVIDENT. WHAT IS HAPPENING IN THE MARKETS AT THIS STAGE IS THAT AN EVER-INCREASING NEED FOR ADDITIONAL CAPITAL IN ALL FINANCIAL INSTITUTIONS FROM BANKS, HEDGE FUNDS AND INVESTMENT BANK, I THINK WHEN WE COME OUT OF THIS, THE MARKETS WILL DEMAND A MUCH HIGHER RATIO OF ECONOMIC CAPITAL AND LOWER LEVERAGE AND A MATTER OF TIME BEFORE THAT THE LINK TO THE OLD SYSTEM WILL BE REVISED AS WILL BE THE REGULATORY REQUIREMENTS IN ALL FORMS OF INSTITUTIONS. FUNDAMENTAL TO RAISE CAPITAL.

BARTIROMO: LET'S LEAVE IT THERE AND CONTINUE OUR CONVERSATION ON HOW THINGS WILL CHANGE AS WE CONTINUE OUR CONVERSATION.STAY WITH US AS WE CONTINUE OUR INTERVIEW WITH DR. GREENSPAN ANDTALK ABOUT THE ENVIRONMENT THAT HAS REACTION TO THE PROPOSED CHANGES.

BARTIROMO: WE CONTINUE WITH OUR EXCUISIVE CONVERSATION WITH DR. GREENSPAN. WE LEFT OFF TALKING ABOUT HOW THE MARKETS WILL CHANGE IN TERMS OF THE REGULATORY ENVIRONMENT. LET ME GET YOUR THOUGHTS BEFORE WE PUT A BUTTON ON HOW WE SEE THINGS IN THE ECONOMY.WHAT DO YOU THINK ARE THE BIGGEST CHALLENGES OR RISKS FACING THE ECONOMY AND THE GLOBAL ECONOMY. THE IDEA THAT THERE IS A DECOUPLING I KNOW THAT YOU ARE NOT A BELIEVEBELIEVEER IN OUR LAST INTERVIEW.WHERE ARE YOU IN TERMS OF THE ECONOMY.

GREENSPAN: THE OBVIOUS PROBLEM IS THAT THE WHOLE FINANCIAL SYSTEM HAS FROZEN. IN THE SENSE THAT THE AMOUNT OF ISSUANCE WITH SECURITIES AND THE OVER ALL DEGREE OF LIQUIDITY THROUGHOUT THE SPECTRUM NOT ONLY IN OBVIOUSLY TRIPLE A OR RISKMENT SECURITIES BUT OUT TO DOUBLE Bs AND TRIPLE Cs. WE HAD A LIQUID SYSTEM WHICH WAS DRIVEN BY I A EUPHORIA THAT BELIEVED THERE WAS NO CEILING TOANYTHING. THAT WAS THE CASE. EVERYTHING TURNS ON A DIME AND WE GO FROM EUPHORIA TO FEAR AND THOSE ARE TWO FUNDAMENTALLY DIFFERENT TYPES OF PHENOMENON. THE FEAR BASE DOMINATING THE ECONOMY NOW IS A CONTRACTION-TYPE PHASE. THE ISSUE FATHAT WE CONFRONT, THE CRITICAL QUESTION IS WHEN WILL THE ESTIMATED EARNINGS, SPECIFICALLY THE WRITE OFFS COME TO AN END? THAT WILL OCCUR BASICALLY WHEN THE PRICE OF HOMES IN THE UNITEDSTATES REACHES BOTTOM. I SHOULDN'T SAY THAT. I WILL SAY THE NECESSARY CONDITION ALTHOUGH IT MAY NOT BE A SUFFICIENT CONDITION BECAUSE AT THE MOMENT WE HAVE WHERE THE REALLY WEAK PART OF THE SYSTEM IS IS IN THE SUBPRIME MORTGAGE-BACKED SECURITIES AND THE ALT A MORTGAGE BACK AND TO A LESSER EXTENT, THE JUMBOS. AS A CONSEQUENCE OF THE PROBLEMS WHICH REST SOLELY ON WHERE HOME PRICES ARE GOING, WE HAVE LITTLE KNOWLEDGE ON THE SIZE OF THE LOSSES.

BARTIROMO: DO YOU EXPECT THAT TO HAPPEN THIS YEAR AND WE WILL SEE A FLOOR IN THE HOME PRICES OR DOES IT GO INTO 09?

GREENSPAN: THAT'S ONE OF THE THINGS I DON'T THINK ANYBODY CAN MAKE A REASONABLY GOOD JUDGMENT ON. WHAT WE KNOW IS THE CONTINUED EROSION IN A BUILD UP OF MORTGAGE-BACKED SUBPRIMES AND MORTGAGES HAS COME TO AN END. THE ISSUANCE OF NON-CONFORMING MORTGAGES IN MARCH WAS ZERO AND IT WAS IN ALT A AND SUBPRIME AND MODEST AMOUNTS IN THE JUMBOS. WE STILL HAVE GOT THE APPROPRIATE PRICING TO CONSTRUCT FOR THE LARGE HOLDINGS OF MORTGAGE-BACKED SECURITIES AND IT STRIKES ME THAT WHAT WE DON'TKNOW IS THE EQUITY IN HOMES WILLBE AT ANY INDIVIDUAL PRICE LEVELBECAUSE REMEMBER, THE ULTIMATE COLLATERAL THAT BACKS UP MORTGAGE-BACKED SECURITIES IS THE EQUITY IN THE HOMES WHICH BASICALLY SUBPRIME FINANCED HOMES HAVE BEEN FINANCED BY SUBPRIMES AND IT'S THAT EQUITY WHICH IS THE KEY VALUE BASE FOR THE MORTGAGE-BACKED SECURITIES AND SIMILARLY FOR A. AS I SEE IT, AS PRICES BEGIN TO MOVE DOWN, YOU GET AN INCREASING SQUEEZE OVER THAT COLLATERAL ANDTHE RESULT IS EVER INCREASING MARK DOWNS.THE ONE SAVING GRACE IF YOU WANTTO PUT IT IN THOSE TERMS, AT THE EVALUATION PROCESS WHICH AS YOU KNOW IS LARGELY THE INDIRECTLY THROUGH THE ABX DERIVATIVES MARKET WHICH IS PRICED OF SUBPRIMES, PARTICULARLY, THEY ARE EXTREMELY DEPRESSED.ONE CAN ARGUE THAT NO MATTER WHERE THE PRICES GO IN ANY REALISTIC SENSE FOR HOMES, WE ARE ALREADY THERE.IF THAT IS INDEED THE CASE, WE WILL EMERGE INTO A MUCH MORE BENEVOLENT ENVIRONMENT SHORTLY, BUT I DON'T THINK WE KNOW THAT AND I DON'T THINK WE CAN KNOW THAT.RIGHT AT MOMENT, WE HAVE BEGUN TO GET THE LARGE OVER HANG OF SAY SINGLE FAMILY VACANT RESIDENTS.

LIESMAN: ONE OF THE QUESTIONS OUT THERE IS WHERE WAS THE FED AS A REGULATOR?THE PERSON WHO CAME UP AND COMPLIMENTED YOU ON THE 401K, HOW DO YOU EXPLAIN, WHERE WAS THE FEDERAL RESERVE AS OVERSEEING THE MARKETS AND STOPPING THIS FROM HAPPENING ANDWILL IT STOP IT IN THE FUTURE THAT SO BRINGS THE FINANCIAL SYSTEM TO THE BRINK?

GREENSPAN: I DON'T THINK WE COULD HAVE. IT'S NOT APPARENT TO ME AND TO A LOT OF PEOPLE WHO LOOK AT THIS ISSUE IN DETAIL, BUT THE PROBLEM WAS ESSENTIALLY IN WHAT WAS VERYEGREGIOUS LENDING PRACTICES EARLY ON IN THE SUBPRIME MARKET. THE REAL PROBLEMS BEGAN TO EMERGE ONLY WHEN WE BEGAN TO ISSUE SUBPRIMES AS MORTGAGE BACKS. BECAUSE THEY WERE MORTGAGE BACKED SUBPRIMES, THEY HAD A HIGH YIELD, BUT THIS WAS DURING THE TIME WHEN PRICES OF HOMES WERE STILL RISING AND DELIQUINCIES AND FORECLOSURES WERE LOW. THE HEDGE FUNDS AND INVESTMENT BANKS WERE LOOKING AT A RATE OF RETURN.THEY SAW THIS AS A MARVELOUS OPPORTUNITY AND THERE WERE HUGE REQUESTS FROM THE HEDGE FUNDS TOTHE SECURITIZERS AND THEY IN TURN PUT PRESSURE ON THE LENDERSAND THE LENDERS BASICALLY BEGAN TO SHUFFLE PAPER AND UNDERWRITING COLLAPSED. I THINK THERE WAS NOTHING ANY OF THOSE REGULATEORS WHO ESSENTIALLY ARE LOOKING AT THE MOST SOPHISTICATED PEOPLE IN THEWORLD MAKING TERRIBLE MISTAKES. ALL EXAMINERS COULD NOT IN MY JUDGMENT.

LIESMAN: WHAT ABOUT THE WAY FORWARD? THE FED MADE LIQUIDITY AVAILABLE. DO YOU HAVE A COMMENT ON WHETHER OR NOT THAT'S APPROPRIATE AND WHETHER OR NOT THE FED IN THE FUTURE IS GOING TO BE A MARKET STABILITY REGULATOR?

GREENSPAN: I THINK YOU HAVE TO ASK YOURSELF IF YOU HAVE A CURRENCY WHICH WE DO HERE, YOU ARE GOING TO GET REGULATION BECAUSE REMEMBER THE SYSTEM DOES NOT HAVE THE CONSTRAINTS THAT OCCURRED WHEN WE WERE ON THE GOLD STANDARD.THE LOGIC FOR REGULATION MUST LIE IN THE AREAS THAT MARKETS DO NOT FUNCTION FULLY IN EQUILIBRIUM WHEN YOU ARE DEALING WITH THE CURRENCY.YOU DON'T WANT TO HAVE THE CENTRAL BANK DIRECTLY INVOLVED IN THAT EXCEPT UNDER EMERGENCY CONDITIONS. I THINK THAT IF YOU ARE GOING TO DEAL WITH A SITUATION LIKE THIS, THE ISSUE FOR APPROPRIATIVE FUNDS OF THE TREASURY TO SET UP SOMETHING LIKE THE RESOLUTION TRUST CORPORATION THAT HAS YOU REMEMBER IT WAS VERY SUCCESSFUL IN RESOLVING THE S AND L CRISIS. THE ISSUE HERE IS THAT PEOPLE LIKE TO THINK THAT THE FEDERAL RESERVICE MONEY IS FREE, BUT IT'S EXACTLY THE SAME MONEY THAT THE PRESSURE TREASURY HAS AND THERE IS NO DIFFERENCE BETWEEN THESE TWO.

BARTIROMO: IT'S INTERESTING BECAUSE YOU SAID THE FED COULD NOT HAVE SEENTHIS COMING OR AT A MINIMUM CHANGED WHAT OCCURRED AND YET ON THE OTHER HAND YOU ARE SAYING WE ARE GOING TO SEE FURTHER REGULATION. WHY SHOULD WE CHANGE THE ENVIRONMENT IF YOU ARE SAYING THAT THE FED'S HANDS ARE TIED ANYWAY AND THE FED COULD NOT HAVE CHANGED WHAT OCCURRED IN THAT ENVIRONMENT AND REALLY THE GLOBAL FORCES DID. SECONDLY, SHOULD BEAR STEARNS HAVE BEEN LEFT TO FAIL?

GREENSPAN: LOOK. I'M NOT TALKING ABOUT -- I WANT TO MAKE A DISTINCTION BETWEEN THE REGULATORY PRESSURES THAT OCCUR FROM COUNTER PARTY SURVEILLANCE. I'M NOT ARGUING THAT THE REGULATORS ARE COMING IN TO CHANGE. I'M SAYING THE INVESTORS ARE CHANGING THINGS. IN OTHER WORDS, YOU CAN ONLY GET THE PRICES THAT APPEAR IN THE MARKETS UP TO LAST AUGUST 9 BECAUSE PEOPLE ARE BIDDING THE PRICES UP. THAT IS GONE. THERE IS NO WAY THAT COMMERCIAL BANKS OR INVESTMENT BANKS CAN FINANCE THEMSELVES AS EASILY AS THEY DID IN THE EARLY ENVIRONMENT AND THE RESULT IS THAT IT IS THE INVESTORS WHO ARE INSISTING IF THEY ARE GOING TO PUT MONEY INTO A FIRM THAT THE LEVERAGE BE BROUGHT DOWN.WHAT THE GOVERNMENTS DO WITH RESPECT TO REGULATION IS REALLY IN A CERTAIN SENSE BESIDE THE POINT. IF THE MARKETS JUST WON'T ALLOW INSTITUTIONS TO CONTINUE DOING WHAT THEY ARE DOING AND WHAT HISTORY HAS ALWAYS SAID TO US, WE REGULATORS FROM GOVERNMENT WILL TEND TO FOCUS ON WHERE THE RISKS ARE AS DEMONSTRATED BY THE MARKET PLACE. EVEN IF THERE IS NO CHANGE IN GOVERNMENT REGULATION, THERE IS GOING TO BE MUCH HIGHER CAPITAL REQUIREMENTS IN THE BANKS AND ESSENTIALLY IN THE INVESTMENT BANKS AND OTHER INSTITUTIONS DRIVEN BY MARKET FORCES.

BARTIROMO: WHAT ARE ABOUT THE USE OF DERIVATIVES? IN THE PAST YOU PRAISED DERIVATIVES AS BEING HELPFUL IN TERMS OF SPREADING THE RISK THROUGHOUT THE WORLD IN RETROSPECT. DO YOU BELIEVE THAT WE SHOULD HAVE HAD HIGHER REGULATORY POLICIES IN PLACE OR THE USE OF DERIVATIVES NOW THAT WE HAVE TRILLIONS OF DOLLARS IN CREDIT DEFAULT SWAPS OUTSTANDING?

GREENSPAN: MOST CERTAINLY NOT. CREDIT DEFAULT SWAPS AS A CONCEPT HAVE DIVERSIFIED RISKS OVER THE YEARSAND HAVE BEEN VERY SUCCESSFUL AS DERIVATIVE INSTRUMENTS.THE PROBLEM HAS NOT BEEN THE INSTRUMENTS THEMSELVES, BUT BACK OFF THE PROBLEMS WHICH THEY COULD NEVER SEE TO GET IN HAND WHEN I WAS STILL AT THE FED. THE FEDERAL RESERVE BACK OF NEW YORK HAD TO STEP IN AND GET THEM TO RECOGNIZE THAT THE DEFAULT SWAPS ARE A 21st CENTURY INSTRUMENT AND THE BACK ROOM WAYS OF ORGANIZING THEMSELVES AND GETTING CONFIRMING AS AND TRANSFERS WITH PENCIL AND TELEPHONE.THERE IS OPERATIONAL RISK THAT COULD CREATE PROBLEMS, BUT THE CONCEPT WANT INSTRUMENT ITSELF IN TRANSFERRING RISK IS A VERY VALUABLE PRODUCT BECAUSE WHAT IT DOES IS REDUCES THE RISK OF THE HIGHLY LEVERAGED INSTITUTION WHICH IS LENDERS AND TO THOSE WITH FAR LESS REFERAGE AND CAPABILITY OF TAKING LOSS WHEN IS AND IF THEY OCCUR.

BARTIROMO: QUICKLY AS WE WRAP UP, DO YOUTHINK BEAR STEARNS SHOULD HAVE BEEN LEFT TO FAIL?

GREENSPAN: I THINK AT THE TIME THAT THE SITUATION AROSE AND WHAT WE WERELOOKING AT WAS A BANK-RUN AND I CAN'T SEE ANY WAY IN WHICH SOMETHING OF WHAT WAS DONE HAD TO BE IMPLEMENTED. IT'S THE CENTRAL BANKERS RUNNING INTO THE CRISIS AND IT'S JUST A QUESTION OF WHICH PARTICULAR INSTITUTION OF GOVERNMENT ACTUALLY TAKES THE RISK.

BARTIROMO: WE WILL LEAVE IT THERE. WE KNOW HOW BUSY YOU ARE AND THANK YOU FOR SPENDING TIME WITH US. DR. ALAN GREENSPAN IN WASHINGTON




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