Greenspan: Fed Actions Did Not Cause Recession

Although admitting that “we are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s,” former Federal Reserve Chairman Alan Greenspan contended Tuesday that the interest rate actions of the Fed were not to blame for the current recession.

In an opinion article on the Wall Street Journal’s web site, Greenspan argued that the true cause of the trouble was in the mortgage lending industry itself.
 
“The interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages,” he wrote. “Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.”

The former chairman penned that mortgage rates became disconnected to the Fed’s target interest rate during the housing boom.

“U.S. mortgage rates’ linkage to short-term U.S. rates had been close for decades,” Greenspan said. “Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.”

Greenspan served as chairman of the Fed from 1987 to 2006, and has often come under fire for creating the recently burst housing bubble by keeping the target rate low during his tenure.

He named the heavy risk taking of the financial industry leaders as one cause of today’s economic woes. Yet “the appropriate policy response is not to bridle financial intermediation with heavy regulation,” Greenspan explained. “That would stifle important advances in finance that enhance standards of living.”

Instead he suggested that the solution to future financial market failures should be “higher capital requirements and a wider prosecution of fraud– not increased micromanagement by government entities.”

One Response to “Greenspan: Fed Actions Did Not Cause Recession”

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