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Sat, Sep 15, 2007 - Page 10 News List

Greenspan says he failed to realize importance of subprime loan problem

AFP , NEW YORK

Former US Federal Reserve chairman Alan Greenspan said he had few tools to contain the spread of subprime mortgages and dismissed critics who blame the Fed for keeping interest rates too low.

In the text of an interview released on Thursday, Greenspan said he failed to realize the importance of the subprime loan problems "until very late in 2005 and 2006," as he was preparing to step down as Fed chairman, but that he could not have stopped them in any case.

Greenspan, in the interview with CBS television, said that one of the Federal Reserve governors raised a red flag on those lending practices, but that there was little he could do.

"Well, it was nothing to look into particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," Greenspan said.

Many of the subprime loans, often made to people with shaky credit, were made outside the banking system. The high rate of failure of these adjustable-rate loans is blamed for the financial market turmoil and recent squeeze in credit markets.

Greenspan, in his first US media interview since stepping down in January last year, said his successor Ben Bernanke "is doing an excellent job."

He also took a swipe at critics who argue that his move to slash the federal funds rate to as low as 1 percent fueled too much speculation and contributed to the housing collapse and current economic turmoil.

"They are mistaken," Greenspan said in remarks to be broadcast on the 60 Minutes program tomorrow.

"It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low," he said.

On Bernanke, Greenspan said he endorsed the current Fed chairman's tougher monetary policy stand, saying the current situation is not the same as when he began cutting rates.

"We were dealing in an environment back there where inflation was easing," he said.

"We could have acted without the fear of stoking inflationary pressures. You can't do that anymore. I'm not certain I would have done anything different" than Bernanke under the current circumstances, he said.

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