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Allan Metzer: Fed Historian Meltzer Says Greenspan Is "Too Easy on Himself"

Former Federal Reserve Chairman Alan Greenspan ignored warnings about the Fed's low interest rates that fueled real estate speculation and the current housing recession, said Allan Meltzer, professor of political economy at Carnegie Mellon University in Pittsburgh.

"I think he lets himself off much too easy,'' said Meltzer, author of a 2002 book on the early history of the central bank, in an interview. "He acknowledged maybe his policy had a little bit to do with it. But he found all kinds of other reasons'' to blame for the housing and mortgage problems today.

Greenspan, in a Wall Street Journal commentary today, said lowering the Fed's target interest rate to 1 percent in 2003 may have contributed to higher home prices by prompting demand for adjustable-rate mortgages, though the impact was "not major.'' He said the Fed was worried about deflation.

Meltzer said he met then with Greenspan at the former chairman's invitation and disagreed with the concern over deflation.

"I said, 'Alan, we have had six or seven deflations in the United States in the history of the Federal Reserve, and only one of them ever had terrible consequences, and that was 1929 to 1933,' '' he said. "That was because deflation was not only bad, but because the money growth was lower and lower and lower, so the expectation was deflation would continue. In all the other six, nothing happened.''

Greenspan "continued to believe that deflation was the problem. He was wrong about that, simply out and out wrong,'' Meltzer said.
Read entire article at Bloomberg News