RPT-UPDATE 3-Greenspan says didn't see subprime storm brewing

Fri Sep 14, 2007 3:13am EDT

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By Mark Felsenthal

WASHINGTON, Sept 13 (Reuters) - Former Federal Reserve Chairman Alan Greenspan said he was late to see the storm gathering around U.S. mortgage lending practices and commended his successor Ben Bernanke's handling of the crisis, saying he would likely be responding in a similar fashion.

"I think he is doing an excellent job," Greenspan said of Bernanke in a television interview scheduled to air on Sunday.

Greenspan was asked if he would lower interest rates as dramatically and quickly now as he did just ahead of, during and in the wake of the 2001 recession, according to excerpts of the CBS "60 Minutes" interview released on Thursday.

"I'm not sure that's true," he said. "We were dealing with an environment back then when inflation was easing. We could have acted without the fear of stoking inflationary pressures."

"You can't do that anymore. ... I'm not sure I would have done anything different (if chairman today)," he added.

The comments from Greenspan, who was tested early in his tenure by the October 1987 stock market crash, come as Bernanke's skills are challenged by rising defaults in the U.S. subprime mortgage market, which caters to risky borrowers, and a related global credit squeeze.

Bernanke's Fed has come under fire from some quarters for not acknowledging quickly enough how deeply the current crisis could harm the economy or responding aggressively enough to keep the U.S. expansion on track. Some analysts have speculated that Greenspan would have acted more swiftly.

Bernanke and his colleagues meet on Tuesday. They are widely expected to lower benchmark overnight interest rates, which the Fed has held at 5.25 percent since June 2006, by at least a quarter-percentage point.

Bernanke had justified holding rates at that level despite some clamoring in markets for lower borrowing costs, on the grounds that inflation has remained troublingly high and needed to recede first. Only in recent weeks, as credit stress mounted in financial markets and it became clear a housing recovery was a long ways off, have Fed officials suggested that worries about growth have supplanted long-standing concerns on inflation.

The Greenspan interview -- on the No. 1 U.S. news program with an average 13.2 million viewers -- is the first in a series of public appearances the former Fed chairman is making to publicize his memoir, "The Age of Turbulence," which is being released on Monday.

STORM BREWING

Greenspan, who stepped down from the helm of the U.S. central bank in January 2006, said that as Fed chief he knew about questionable lending practices that were leaving subprime borrowers with adjustable rate loans vulnerable to harm from rising interest rates, but did not recognize those loans would trigger broader problems until fairly recently, CBS said.

"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," Greenspan said. "I really didn't get it until very late in 2005 and 2006."

Greenspan, 81, has received credit for leading the economy to its longest-ever expansion in the 1990s and many economists have praised his handling of a sequence of crises.

Indeed, some have hailed him as the greatest central banker in U.S. history.

However, others criticize Greenspan for sowing the seeds of successive asset bubbles, first in U.S. stock markets and later in housing. He has also come under fire for suggesting during his Fed tenure that adjustable rate mortgages could be a cost-saving financing option for many borrowers, just shortly before the Fed embarked on a long push to move rates higher.

In the interview, Greenspan defended the Fed's decision under his leadership to hold interest rates at or near lows not seen in four decades between December 2001 and June 2004, a period in which the economy was enjoying only a lackluster recovery from recession.

Many critics charge that current subprime problems and the prolonged housing slump are the result of the fizzling of a residential real estate frenzy fueled by this prolonged period of cheap borrowing costs.

But Greenspan said those critics fail to grasp that low rates were necessary to breathe life into an economy that was reeling from multiple shocks.

"They are mistaken," he said. "It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low."

The "60 Minutes" interview is scheduled for broadcast on Sunday at 7 p.m. (2300 GMT).

(Additional reporting by Michelle Nichols in New York)

((Reporting by Mark Felsenthal; editing by Jonathan Oatis; Reuters Messaging: mark.felsenthal.reuters.com@reuters.net; email: mark.felsenthal@reuters.com; +1 202 898 8329))

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