Alan Greenspan says market crisis 'inevitable'
By Catherine Boyle
Alan Greenspan has claimed that the current market crisis afflicting the US was inevitable and defended his record as chairman of the Federal Reserve yesterday.
Economists believe that Alan Greenspan kept interest rates too low for too long
Mr Greenspan's record has been criticised by other economists in recent months as his successor at the Fed, Ben Bernanke, struggles with problems which began during Mr Greenspan's tenure. Many economists believe that he
kept interest rates too low for too long, fuelling the US housing bubble, and that he should have kept a closer eye on banks. The once seemingly unassailable Mr Greenspan hit back at his critics in an interview with the Washington Post, and claimed there was little he could have done to prevent the current market crisis. He said: "Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time.
"I don't know of a single example of when interest rate policy has been successful in suppressing gains in asset price."
Mr Greenspan admitted that the Fed "lost control" of long-term interest rates "as did the Bank of England and all the central banks. As a consequence, we had very little ability to put a brake on the rise in home prices."
Some economists argue that if the Fed had been able to exert some control over house prices, less people would have been unable to pay back their sub-prime mortgages in the US. Sub-prime mortgages are at the root of the market turmoil.
However, the Fed was more concerned about "corrosive deflation" in the crucial 2003-04 period, according to Greenspan.
The Fed has intervened dramatically in the market in the past week, slashing interest rates by 0.75 percentage points on Tuesday and lending directly to securities firms for the first time since the Great Depression.
Mr Greenspan maintained that the ongoing credit crisis was always going to happen and said: "If it weren't the sub-prime crisis, it would have been something else."
He said that the current crisis was caused by the end of a "protracted period" of "underpricing of risk" and blames financial institutions for deciding that sub-prime mortgage loans were "a steal".
kept interest rates too low for too long, fuelling the US housing bubble, and that he should have kept a closer eye on banks. The once seemingly unassailable Mr Greenspan hit back at his critics in an interview with the Washington Post, and claimed there was little he could have done to prevent the current market crisis. He said: "Those who argue that you can incrementally increase interest rates to defuse bubbles ought to try it some time.
"I don't know of a single example of when interest rate policy has been successful in suppressing gains in asset price."
Mr Greenspan admitted that the Fed "lost control" of long-term interest rates "as did the Bank of England and all the central banks. As a consequence, we had very little ability to put a brake on the rise in home prices."
Some economists argue that if the Fed had been able to exert some control over house prices, less people would have been unable to pay back their sub-prime mortgages in the US. Sub-prime mortgages are at the root of the market turmoil.
However, the Fed was more concerned about "corrosive deflation" in the crucial 2003-04 period, according to Greenspan.
The Fed has intervened dramatically in the market in the past week, slashing interest rates by 0.75 percentage points on Tuesday and lending directly to securities firms for the first time since the Great Depression.
Mr Greenspan maintained that the ongoing credit crisis was always going to happen and said: "If it weren't the sub-prime crisis, it would have been something else."
He said that the current crisis was caused by the end of a "protracted period" of "underpricing of risk" and blames financial institutions for deciding that sub-prime mortgage loans were "a steal".
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