WASHINGTON (MarketWatch) — The housing bubble was not created by the central bank’s monetary policy, but rather long-term mortgage rates were a key contributor, former Federal Reserve Chairman Alan Greenspan told the Financial Crisis Inquiry Commission, a government-appointed inquiry panel, in defense of his tenure on Wednesday.
“The house price bubble, the most prominent global bubble in generations, was engendered by lower interest rates, but it was long-term mortgage rates that galvanized prices, not the overnight rates of central banks, as has become the seeming conventional wisdom,” Greenspan said.
Greenspan has been criticized for holding the central bank’s interest rates too low, contributing to the crisis and also for failing to use the Fed’s responsibility to protect consumers from subprime and other problem mortgages that were a key contributor to the financial crisis.
Specifically, Greenspan – and his successor Ben Bernanke — have been criticized for failing to employ the central bank’s authority to write and enforce strong consumer protection regulations for mortgage and credit card products.
“Why in the face of all [the subprime lending] did you not move to contain abusive subprime lending?” asked the panel’s chairman, Phil Angelides. “It’s good you issued guidance, but that is awareness but failure to act.”
Defending his tenure, Greenspan also argued that the origination of subprime mortgages was not a significant cause of the financial crisis.
He argued that, instead, it was the rise in global demand for securitized subprime mortgages, that was a significant cause. He also argued that the institutions subject to the Fed’s or other federal banking regulators were not the primary players in the subprime loan origination business.
“We did do almost all of the things you are raising. The consequences are that things were better than they would have been had we not done it. The reason for that was the extraordinary changes to the markets,” Greenspan said.
“The data show that, in 2004 and 2005, more than half of subprime loans were originated by independent mortgage companies subject to consumer protection enforcement by the Federal Trade Commission and various state agencies,” said Greenspan
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