Former Federal Reserve chairman Alan Greenspan admitted he was slow to realize that a surge in subprime mortgage lending to borrowers with poor credit had the potential to harm the economy.
In an interview with CBS News program 60 Minutes to air Sunday, Greenspan also praised his successor, Ben Bernanke, and said he probably wouldn't do anything differently in addressing the current seize-up in international credit markets.
CBS released excerpts from the interview Thursday.
Greenspan, promoting his new book, The Age of Turbulence, which will be released Monday, said he "didn't really get it" regarding potential damage from subprime lending until late in 2005.
At a recent Fed conference in Jackson Hole, Wyo., several prominent economists, including Stanford professor John Taylor and UCLA professor Edward Leamer, criticized the Fed's handling of the housing boom that has now gone bust, saying the central bank left interest rates too low for too long and didn't do enough to regulate lending.
About 2 million subprime borrowers with adjustable-rate mortgages are at risk of default or foreclosure.
"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," Greenspan told 60 Minutes. "I really didn't get it until very late in 2005 and 2006."
Greenspan said there was little he could have done about the practices.
"It was nothing to look into particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," he said.
The former Fed chairman defended the central bank's decision to cut interest rates from 2001 to 2004, saying, "It was our job to unfreeze the American banking system if we wanted the economy to function. This required that we keep rates modestly low."
The rate cuts came at a time when the economy was faltering and inflation was so low there was concern about deflation, a sustained downward price spiral.
Bernanke's Fed has taken steps to address market problems, including adding liquidity to the financial markets. The Fed is widely expected to cut its target for a key short-term rate when it meets Tuesday.
Asked whether he would have acted more dramatically if he were still Fed chairman, Greenspan said, "I'm not sure that's true."
"We could have acted without the fear of stoking inflationary pressures. You can't do that anymore," Greenspan said. "(Bernanke) is doing an excellent job."
After leading the Federal Reserve for 18½ years, former Fed chairman Alan Greenspan has written a book about his life and his time at the central bank. The Age of Turbulence comes out Monday, and USA TODAY will take a look at the man and the book.