Throwing tomatoes at the maestro

New York: Alan Greenspan retired in January 2006 as one of history's most-lauded Federal Reserve Board chairmen, the subject of accolades that stopped just short of deification.

But just as markets have a way of overshooting both on the way up and on the way down, the needle on Greenspan's Fed tenure has swung from adulation to denunciation in a matter of months.

With the economy now sputtering, Greenspan has increasingly been tagged as 'Mr Bubble' - the ideologue whose loose-money policies and lax regulation are blamed for the ongoing real-estate collapse, the near-meltdown of the mortgage industry and the toppling of some Wall Street giants.

The 82-year-old economist, once called "the Maestro" for guiding the economy during its longest postwar boom, is responding to the backlash with a vigorous defence. In newspaper and television interviews and in internet forums, Greenspan has accused critics of applying unfair hindsight to problems that no one could have foreseen."I have no regrets on any of the Federal Reserve policies that we initiated back then," Greenspan said on Tuesday in an interview on CNBC.

Although the consequences were sometimes unexpected, he said, the Fed reached its decisions rationally. "In retrospect, do I think it would've been nice to have a higher record of forecasting accuracy? Of course. Do I think that it's possible? No." In this and other recent interviews, Greenspan has clung stubbornly to his contention that too-strict regulation is a bigger threat to economic well-being than are the periodic blowups to which free markets are prone. Greenspan, who declined to comment for this article, told the Wall Street Journal he was "being blamed for things I didn't do."

According to Representative Barney Frank, one of the things that Greenspan didn't do - to his discredit - was exercise the Fed's regulatory power over the mortgage industry when there was still a chance of averting the subprime loan mess. Frank, chairman of the House Financial Services Committee, said in a recent interview that he found Greenspan's thinking oddly "bifurcated."

Contrast

On the one hand, Greenspan was seen as intellectually flexible enough to cast off the traditional Fed notion that whenever the unemployment rate fell below five per cent, interest rates had to be raised to head off inflation. Frank credited Greenspan with having the insight to realise that technology-fuelled productivity gains in the 1990s were keeping inflation in check even when jobless rates dipped to postwar lows, so there was no need to slam the brakes on the economy.

But when it came to bank regulation, Frank said, Greenspan could be "a very rigid ideologue". Congress in 1994 gave the Fed new authority to curb excesses and abuses in the nonbank mortgage lending sector. But the Fed failed to intervene a few years ago when lenders began offering zero-down-payment mortgages with super-low "teaser" rates and "no-doc" applications under which people could qualify for loans without proving they had the income to support them.

The easy terms fuelled speculation and encouraged people to stretch for mortgages they couldn't afford, in hopes that they could refinance later when home prices inevitably rose. As such dubious loans got packaged into securities that were eagerly snapped up here and abroad, the stage was set for a crisis.

All it would take was a drop in housing prices or a rise in rates - and both things happened. In Frank's view, the Greenspan Fed refused to rein in irresponsible lending because of its chairman's belief that markets correct their own problems more effectively than regulators can. Greenspan, a longtime devotee of free-markets guru Ayn Rand, hasn't backed off that position an inch.

In a back-and-forth with critics - most of them economists - on the Financial Times website last week, Greenspan said bank regulators know less about the markets they patrol than do bank risk managers and loan officers. Far from anticipating problems, he said, regulators tend to keep fighting the last war. "Most regulatory activity focuses on activities that precipitated previous crises and that investors have long since largely abandoned," he wrote, conceding that "new laws may prevent recurrences."

Greenspan's critics also fault him for keeping interest rates too low for too long after the brief recession of 2001. The Fed brought short-term rates all the way down to one per cent in 2003 and didn't reverse course until the following year. The loose-money regime encouraged reckless lending, critics contend.

Cheap

Money became so cheap that it was easier for borrowers to keep up with their payments, said banker Charles R. Morris, author of The Trillion Dollar Meltdown. The resulting drop in default rates temporarily made risky assets look safer than they were, he said, causing many investors to plunge into securities they normally would have avoided. When the crash finally came, it was far broader than it otherwise might have been.

For example, banks in Europe nearly got knocked over by investments related to US mortgages. Billionaire financier George Soros, who is out with a new book on the financial crisis, said in an interview that Greenspan was "definitely responsible for the housing bubble" both because of the sustained low rates and the Fed's failure to issue stricter mortgage-lending rules.

Greenspan has countered the loose-money critique by noting that housing bubbles emerged in more than a dozen developed nations during the same period and with about the same characteristics as in the United States. If the Fed inflated the US bubble, he has asked, how did the divergent policies of overseas central banks all produce a similar result in their own countries? More likely, Greenspan has said, is that the bubble resulted from a historically long period of low interest rates - determined not by regulators, but by global markets.

In the CNBC interview, Greenspan endorsed the use of taxpayer dollars to help ease the mortgage mess. He envisioned a vehicle like the Resolution Trust Corp, which was created to liquidate mortgages and real-estate assets in the aftermath of the 1980s savings and loan crisis. He also said it made sense for the government to intervene last month to prevent the Bears Stearns Cos. brokerage from collapsing. Such views are at odds with the sink-or-swim philosophy of the most extreme free-market adherents.

Morris noted the discrepancy. Greenspan, he said, believes that "asset prices are determined in highly sophisticated markets, and the government has no business interfering. Except when asset prices go down and the government has to step in and set a floor."