In a detailed review of the causes of the financial crisis, former Federal Reserve Chairman Alan Greenspan acknowledged a range of regulatory failures but strongly disputed the widely held view that the Fed left interest rates too low for too long.
"We had been lulled into a sense of complacency by the modestly negative economic aftermaths of the stock market crash of 1987 and the dot-com boom," Greenspan said in a paper, "The Crisis," that he will present at a Brookings Institution conference today. "Given history, we believed that any declines in home prices would be gradual. Destabilizing debt problems were not perceived to arise under those conditions."
In Greenspan's 48-page review of the causes and consequences of the crisis, the text of which was released by Brookings, he acknowledged that the regulatory system failed, that Fed officials did not take seriously enough the risks building in the subprime mortgage market last decade, that regulators more broadly did not demand that banks hold enough capital and that he did not do enough to rein in "megabanks" that posed a risk to the financial system.
Greenspan said rates on 30-year fixed-rate mortgages drove the housing boom, not the overnight lending rates the Fed controls.
Because of the flood of foreign capital, he said, longer-term rates became less closely linked to the federal funds rate during the boom, something he described at the time as a "conundrum."