The prevailing view among critics faults Greenspan on two main counts. First, they say, his Fed lowered rates too much from 2001 to 2003 to cushion the economy from the bursting dot-com bubble. Then it took too long to raise them again. Low rates fueled mortgage borrowing, driving home prices to unsustainable heights. Second, they say, the Fed was lax in its regulatory role. The central bank failed to press for stiffer rules for underwriting mortgages to people who ultimately couldn't afford them, they say. Also, they say, the Fed failed to anticipate banks' exposure to risky homebuyers.
At the time, Greenspan expected his policy to boost housing because the rest of the economy was relatively unresponsive to lower interest rates. Based on decades of his own research, he believed a buoyant housing market would spur consumers to borrow against home values and spend more. This would not produce a housing bubble, he predicted, because it was difficult to speculate in homes and the memory of the 2000 tech-stock bust remained fresh.
Greenspan now acknowledges that he was wrong about the improbability of a housing bubble. But he does not share some foreign central bankers' belief that their job is to defend against excessive asset-price inflation: No sensible policy, he maintains, could have prevented the housing bubble.
"I am reasonably certain that I am right here," Greenspan says. If proved wrong, he says, "I will change. I do not have a vested interest in holding wrong ideas."
Greenspan is particularly perturbed by attacks over a 2004 speech in which he suggested that more borrowers would benefit from adjustable-rate mortgages. Interest rates were at a historical low at the time, which means that those who held on to the mortgages would have seen rates adjusted upward.
Greenspan says the speech merely pointed out that many people who get a 30-year mortgage move or refinance long before it matures. Eight days after giving the speech, he says, he clarified his comments to say he hadn't meant to disparage 30-year fixed-rate mortgages. "In all seriousness, this is really quite unfair," he says.
The biggest question mark over Greenspan's record is his decision to slash interest rates to 1 percent in 2003 and wait to raise them until 2004, and then only slowly. In this debate, Greenspan and his critics seem to speak different languages.
Critics talk about the events that followed - an overheated housing market and a rapid buildup of debt on Main Street and Wall Street, much of which is now painfully unwinding. Such critics are now in the majority.
Greenspan focuses not on events that followed the policy but on the thinking behind it. "I don't remember a case when the process by which the decision- making at the Federal Reserve failed," he says.
He justified the policy that allowed rock-bottom interest rates by noting that at the time, inflation was falling persistently and the risk of deflation - though small - seemed real.
