From Homescape

The Federal Reserve meeting this week brought about two key short-term interest rate cuts by half a percentage point, to 3 percent. The cuts, the second in just over a week, is expected to push down the cost of borrowing in this country and provide relief for holders of adjustable-rate mortgages connected to the federal funds rate. Fed Chairman Ben Bernanke, who replaced long-time chair Alan Greenspan in 2006 when he retired, has had some very big shoes to fill. Greenspan is often considered one of the most influential chairmen of the Feds in United States history.

As widespread insecurity trickles through the financial sector, Bernanke’s leadership is being watched under a microscope. Last Tuesday, the Fed slashed interest rates by three quarters of a percentage point to avert a crisis in the bond insurance market and to address anxieties on Wall Street that the economy is on the brink of a recession. While some analysts say the move should have come sooner, others argue the Feds need to let the market repair itself and the rest of the country should buckle up for a recession.

Greenspan’s path
During Greenspan’s 18-year reign, the stock market boomed and growth spread like wildfire throughout the finance sector. Greenspan is also credited for shepherding the economy through the shock of the September 11 attacks. But as ominous signs show the economy slipping into the dark abyss of a recession and the housing market continues to spiral downward, critics argue that Greenspan could have done more to prevent the current financial crisis confronting the country. Some economists go as far as saying that Greenspan helped establish a pattern of bailing out Wall Street investors and that he could have stopped the shady practices of subprime lenders during its peak.

Last September Greenspan sat down with “60 Minutes” reporter Leslie Stahl to defend his role in the subprime housing collapse. Throughout the interview Stahl holds Greenspan’s feet close to the flames as she fires harsh questions at him. During his tenure, Greenspan’s advice and decisions were often highly regarded, and he rarely faced harsh criticism. But Stahl forces the retired chairman to put up his dukes when she asks him: “If you knew these practices were going on [with subprime mortgages] why didn’t you speak out?”

In a surprising admission, Greenspan said he “had no notion of how significant [the subprime lending practices] had become until very late. I really didn’t get it until very late into 2005.”

Bernanke’s turn
During the interview, the former Fed chair defends his naiveté and argues there was nothing he could have done to stop the subprime tsunami that has devastated the current housing market. While I think the Feds, lenders and individual borrowers all play apart in this fiasco, I don’t think Greenspan is the cause or could have been the savior of the housing crisis. But I do think it’s important to understand how Greenspan’s lack of action during the housing boom in 2005 has affected where we are today, and hopefully Bernanke can learn not to make the same mistakes in the coming year.