A big hat tip to Mike Folkerth for this 60 Minute clip of Leslie Stahl’s interview with Alan Greenspan.  [Transcript follows]

 

Stahl:  One of your former Fed governors, Ed Gramlich said that he proposed that the Fed examine these lending practices and look into them from, to see if something could be done and that you rejected that idea. Why did you reject it?

Greenspan:   Well I thought that it, one would not be, we would not be capable of doing what he was suggesting.

Stahl:  But of sitting on them, taking some regul…, what…

Greenspan:  Well I think not.

Stahl:  Even if you even looked into it?

Greenspan:   Well I, that’s not, there’s nothing to look into particularly because we knew that there was a number of such practices going on, but it’s very difficult for banking regulators to deal with that.

Stahl:   If you knew these practices were going on, or even just maybe suspected there was something illegal or shady, why didn’t you speak out?

Greenspan:   Well basically…

Stahl:   I mean you had a huge megaphone.  People really listen to Alan Greenspan.

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

 

This inverview brings up a couple of questions.  First what exactly was Gramlich’s proposal?

Gramlich said he proposed to Greenspan "in or around 2000” when predatory lending was a growing concern, that the agency use its discretionary authority to send examiners to the offices of consumer finance lenders that were units of federally-regulated bank holding companies.

Greenspan was quoted by reporters as having explained that there is "a very large number of small institutions, some on the margin of scrupulousness and very hard to detect when they are doing something wrong. For us to go in and audit how they act on their mortgage applications would have been a huge effort, and it’s not clear to me we would have found anything that would have been worthwhile without undermining the desired availability of subprime credit.”

He added that borrowers could also get a false sense of security from a lender that advertised itself as Fed-inspected.

I looked back at speeches made by Greenspan during 2005 to see if he was in fact using his "megaphone" once he "got it" in 2005.  In a July 2005 speech before the Committee on Financial Services, Greenspan did state:

The apparent froth in housing markets appears to have interacted with evolving practices in mortgage markets. The increase in the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages are developments of particular concern. To be sure, these financing vehicles have their appropriate uses. But some households may be employing these instruments to purchase homes that would otherwise be unaffordable, and consequently their use could be adding to pressures in the housing market. Moreover, these contracts may leave some mortgagors vulnerable to adverse events. It is important that lenders fully appreciate the risk that some households may have trouble meeting monthly payments as interest rates and the macroeconomic climate change.

For a man who supposedly was starting to "get it", his warning was half-hearted, and he downplayed the potential difficulties as he continued:

The U.S. economy has weathered such episodes before without experiencing significant declines in the national average level of home prices. Nevertheless, we certainly cannot rule out declines in home prices, especially in some local markets. If declines were to occur, they likely would be accompanied by some economic stress, though the macroeconomic implications need not be substantial. Nationwide banking and widespread securitization of mortgages make financial intermediation less likely to be impaired than it was in some previous episodes of regional house-price correction. Moreover, a decline in the national housing price level would need to be substantial to trigger a significant rise in foreclosures, because the vast majority of homeowners have built up substantial equity in their homes despite large mortgage-market-financed withdrawals of home equity in recent years.

In spite of "getting it" then, he sure didn’t work hard to make sure that everyone else "got it" as well. In fact, in his Economic Outlook speech before the Joint Economic Committee meeting in November 2005, there was no mention of the housing or mortgage markets at all.  Maybe he figured that since is was difficult for banking regulators to deal with, it wasn’t worth mentioning.