Greenspan: 60% Success Is ‘Doing Extraordinarily Well’

Former Fed Chairman Alan Greenspan has been out in full force this week defending his monetary policies amidst growing criticism that his decision to keep the Fed Funds Rate at 1% from July 1, 2003 through June 30, 2004. He wrote a rebuttal to critics in the Financial Times, and then did an interview with CNBC. Some say it’s hard to believe a guy who led with: “If we can get forecasts right 60% of the time, then we’re doing extraordinarily well.” After all, if we could ascribe the same success metric to our own jobs, we’d all be wildly successful.

However, Greenspan has actually made some valid points in recent days. Regarding rates, he correctly points out that long-term rates were low during the home price run-up and would have spurred housing prices anyway. Regarding a fix for the housing crisis, he said that we should consider a solution similar to the Treasury’s Resolution Trust Corporation which ran from 1989 to 1995 as a way to help unwind the S&L crisis — the RTC was set up to liquidate assets of troubled savings and loan associations that had been declared insolvent by the Office of Thrift Supervision.

Right now there are two housing rescue plans in the works, one from the Bush administration and one from Congress. The administration wants banks to forgive negative equity for owner-occupied borrowers and then to use FHA to insure the remaining balance of loans. This is designed to keep people in their homes rather than having them walk away. Congress wants to implement a second economic stimulus plan with about $20 billion in tax and other incentives for homeowners, builders and companies. The end result should be some combination of the RTC and both proposed plans, but in the rush to regulate (and therefore have some soundbytes for campaign speeches) in an election year, we may see a band-aid fix instead of a fully thought out solution. Call it a 60% solution … only it won’t do extraordinarily well.