Housing Slump Tarnishes a Fed Leader's Legacy

By David R Francis columnist | The Christian Science Monitor, December 24, 2007 | Go to article overview
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Housing Slump Tarnishes a Fed Leader's Legacy

David R Francis columnist, The Christian Science Monitor

By the time Alan Greenspan left the Federal Reserve in 2006 after 18 years as chairman, he was almost sainted by many in the financial community.

No longer. The subprime mortgage crisis has pummeled his reputation.

"It's hurting him," says David Wyss, chief economist of Standard & Poor's, a financial information service in New York. "He didn't solve all the problems of the world. He didn't walk on water. But he swam pretty well."

Of course, the hindsight of critics can often be better than their foresight.

On the monetary policy side, for instance, some critics don't recall the mental atmosphere in 2001 when Mr. Greenspan's Fed cut a key interest rate to about 1 percent and kept it there until 2004. Many economists then were worried about the possibility of a depression or a 10-year economic stagnation like that which had hit Japan.

Maybe the Fed should have raised that rate sooner, suggests Mr. Wyss, possibly diminishing the size of the recently burst housing price bubble. But that action might also have led to "a deeper and longer recession," he adds.

Regardless, the criticism of Greenspan is now shifting away from monetary policy to what's seen as the central banker's weakness on the regulatory side.

"Greenspan's a libertarian," says Charles McMillion, head of MBG Information Services in Washington. "He's opposed to regulation by background ... and got away with it for the most part during his tenure. I was always just astonished at his lack of interest in the regulatory role of his job."

Other economists make similar jabs.

"There was a horrible failing of regulation in the last six years or so," says Dean Baker, codirector of the Center for Economic and Policy Research in Washington. He says Greenspan should have used the Fed's powerful regulatory and supervisory functions in the financial area to deflate such bubbles as soaring stock market prices in the 1990s and the housing bubble.

The Fed's financial regulators and others did meet in August 2005 to look at slipping credit standards in the mortgage industry, recalls Harald Malmgren, a Washington economic consultant. But neither Greenspan, nor his academic-inclined successor, Ben Bernanke, made any regulatory moves to stem the rampant greed in the mortgage market.

That is, until last Tuesday when the Fed proposed changes in the Truth in Lending regulations "to protect consumers from unfair or deceptive home mortgage lending and advertising practices."

"There is no excuse for them taking so long," says Mr.

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