Greenspan defends interest rate policy

March 21, 2008 at 8:17 AM
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WASHINGTON, March 21 (UPI) -- Former U.S. Federal Reserve Chairman Alan Greenspan defended his interest rate policy, but said he should have monitored banks more closely.

"I don't know a of a single example of when interest rate policy has been successful in suppressing gains in asset prices," he said.

Greenspan said low interest rates during his years as chairman were due to global economic forces.

The current economic crisis came after a period of "disinflationary forces" and a long period of "underpricing of risk," Greenspan told The Washington Post Thursday.

Other economists say the Fed's long period of low interest rates -- set at 1 percent for more than a year -- set the stage for increased popularity of adjustable rate mortgages and spurred the illusion of cheap money.

Low interest rates "made money very cheap and we began to see the whole leveraging process we see today," said Lee Hoskins, former president of the Cleveland Federal Reserve Bank.

Princeton economic professor Alan Blinder, vice chairman of the Fed in the mid-1990s, said the low interest rates from 2003 through 2004 were a "minor blemish" but that Greenspan "brushed off" the possibility banks were writing risky mortgages.

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