The Financial Crisis and Regulatory Missteps

It's Consider This, where every day we go deep on one big news story , today remembering a titan among federal reserve chairs. It's my pleasure to welcome Alan Greenspan back to official service to his country. Alan Greenspan, the longtime federal reserve chairman, being sworn into office by President Ronald Reagan in nineteen eighty seven. Greenspan led the central bank for nearly twenty years . Much of his tenure was marked by falling unemployment and an economic boom. But two years after he retired came the two thousand eight financial crisis. Critics argue that it was his hands off approach to regulation that set the stage for the crash. Greenspan admitted that his approach wasn't perfect. Here he is speaking to the House Oversight Committee in october two thousand eight. I made a mistake in presuming that the self interest of organizations , specifically banks and others were such as that they were best capable of protecting their own shareholders and their equity in the firms . Greenspan died Monday at the age of one hundred . Consider this. Alan Greensman ran the Federal Reserve for nearly two decades and was a celebrity among central bankers. What legacy does he leave behind? From NPR, I'm Wanna Somers . It's Consider Us from NPR. Here to talk more about Alan Greenspan's legac y is NPR Scott Horseley, either. Hi, good to be with you. Good to talk with you, so Scott. Greenspan led the Federal Reserve under four different presidents, Ronald Reagan, Bill Clinton, both George Bush's. How did the economy fare while he was in charge. You know, the highs greatly outnumbered the lows, and that's partly a credit to Greenspan. He'd only been on the job for a couple of months when the stock market crashed in nineteen eighty seven, tumbling more than twenty percent on what became known as Black Monday. And Greenspan moved quickly to make sure banks had plenty of money to keep lending so the gears of the economy did not seize up . And as a result, that crash of ' eighty seven is barely a blip now in financial history . Donald Cohen, who worked with Greenspan at the Fed, says future chairs used similar tactics when they were faced with shocks like nine hundred eleven or the coronavirus pandemic. In a sense, what he did set a pattern for fed reactions to these crises. Greenspan was a larger than life figure whose celebrity was not confined to the business pages, the newspaper. Like his predecessor, Paul Volker, he raised interest rates at times to keep prices under control. But Greenspan's perhaps best remembered for a decision not to raise interest rates, even though a lot of people thought he'd have to. What was going on that people thought would require a rate hike? In the mid to late nineteen nineties, we had what seemed at the time like very low unemployment rates, and when that happens, central bankers often raise interest rates to keep the economy from overheating and causing inflation. But Greenspan was skeptical of that kind of formulaic policy making. He was a very talented jazz musician. He studied clarinet at Juilliard, and he was not afraid to improvise. Cohns as Greenspan's read of the economic data was that productivity was rising, so the economy was not in danger of overheating and inflation would stay in check. He had to resist the conventional wisdom wanted him to do, which was to raise rates to prevent a pickup in inflation . But it wasn't just an idea he had. It was all backed by data and reasoning. And you hear echoes that argument today from people who want lower interest rates. Kevin Wars, who just took over as Fed Chairman, says he hopes to follow where Greenspan led. Chairman Greenspan was the first to tell me and show me what this role demands. At his own swearing in last month, Wars praisedh Greens pan for his energy and his sense of purpose. Now, Greenspan was widely quoted, but Scott I have to ask, did people really understand what he was saying? You know, Greenspan was fluent in the obscure language known as Fed speak , and he sometimes deliberately obfuscated to avoid saying anything that might move financial markets. Looking at the overall gross domestic price index from a macro point of view confir the essential order of magnitude of the bias implied . Did you get that one ? One memorable exception was when Greenspan's words did rattle markets. It came in nineteen ninety six at a time when the stock market was booming and he fueled fears that it might be a bubble. How do we know when irrational exuberance has unduly escalated asset val ues. NBC's Andrea Mitchell alluded to that notorious comment in her statement today, saying Greenspan was irrationally exuberant for baseball, Washington's pro football team, tennis, golf, and music. Greenspan retired as Fed chairman back in two thousand six. Two years later, of course, we had the financial crisis. How did that affect his legacy? It definitely tarnished it. Greenspan was a libertarian. He was a follower of the philosopher and novelist Ayn Rand , and he believed that bankers didn't need a lot of regulation because he thought their own self interest would prevent them from taking undue risks. Now that turned out to be a very costly misjudgment. Greenspan's hands off approach to regulation set the stage for the financial crisis in which close to ten million people lost their homes, millions more lost jobs and savings. Here's Donald Cohen again. Could he have raised the alarm more? Could he have tried to get the rest of the government to pay more attention? Yeah, I think he could have. Cohen says he'll remember Greenspan as someone who is really good at setting interest rates, maybe not so good at regulation and Greenspan himself acknowledg ed those missteps when he later testified before a Congressional Committee that investigated the financial crisis. And PR Scott Horseley, thank you. You're welcome . This episode was produced by Mia Vencat and Karen Zamor a. It was edited by Pola Viga Goy, Christopher Natalyata, and Ten Beat Armus. Our interim executive producer is Courtney Dorne