Q: With the knowledge you gained from the financial crisis, has it changed your own assessment of how well you performed as Fed chairman?
A: The real question is, should I have done something different? And the answer to that question is no. Did we make mistakes? You bet we made mistakes. But I thought our record was fairly good. Remember, we stepped in, probably at just the right time after Oct. 19, 1987, when the market went down 22 percent. It was pretty rocky for awhile, but I thought we maneuvered that better than I expected we would be able to do. There were a lot of things of that nature where I thought we did well. And there were other things we didn't do well.
Q: A lot of criticism centers around the failure of the Fed and other regulators to deal with the explosion of subprime mortgages, which were packaged into securities that then turned bad and were at the center of the troubles. Should the Fed have handled subprime mortgage regulation differently?
A: The problem is that we didn't know about it. It was a big surprise to me how big the subprime market had gotten by 2005. I was told very little of the problems were under Fed supervision. But still, if we had seen something big, we would have made a big fuss about it. But we didn't. We were wrong. Could we have caught it? I don't know.
Q: You're not a big fan of the Dodd-Frank Act (the 2010 financial regulation law that aims to prevent another crisis). Why not?
A: It was written politically, in a way that the regulators get the responsibility to solve the problem. There is a whole list of things the act wants done, and it specifies how individual regulators are going to solve the problems. Regulators are now required to do vastly more and to square it with other agencies.
Q: You got to know Larry Summers during his eight years at the Treasury Department during the Clinton administration, and you also worked with Janet Yellen when she was a member of the Fed board. Can you talk about both of them? (Summers and Yellen were rivals for the Fed chairmanship.)
A: The one thing about Larry is that we had breakfasts a couple of times a week for years. And never did a word get out. Those were important meetings. You get a certain trust for somebody. I know Larry's shirts stick out the back of his belt. Who cares? The guy is very smart, and he is unquestionably qualified for most any job you can think of. But then so is Janet. There were times when I came to her and I said, 'I don't understand what this academic is saying.' And she would explain it to me. That is a valuable resource. She is very sharp.
Q: On a more personal level, what books are you reading that you would recommend?
A: "Lords of Finance" is a very excellent book. He (Liaquat Ahamed, author of the Pulitzer Prize-winning history of central bankers) is going to be my moderator here next Tuesday. That book is an extraordinary book. I read the book on Coolidge (a biography of President Calvin Coolidge by Amity Shlaes) which I found fascinating because so little is known about him.
Q: Do you admire Coolidge?
A: Yes. I always have. He had his problems. It is a very interesting period of American history which I don't fully understand.
Q: Any other books you would recommend?
A: "The Battle of Bretton Woods" (Benn Steil's history of the 1944 international conference in New Hampshire that helped shape modern global finance) is a book I read recently, which is excellent. What those three books have in common is they provide a type of detail which I was never aware of. I know a great deal about history, but I was quite surprised.
Q: You're famous for your love of delving into the minute detail of economic statistics to help track the economy. One of your favorite statistics has been railroad boxcar loadings of autos and other manufactured goods. Are you still following that type of information?
A: Let me put it this way: When (the federal government) stopped publishing data a couple of weeks ago, one thing I had to tell what was going on with the economy was car loadings.
Q: Should the Fed start reducing its $85 billion a month in bond purchases?
A: I've tried to stay away from specific comments on Fed policy, for one good reason. Paul Volcker (his predecessor as Fed chairman) was very thoughtful. He never commented on Fed policy. I don't comment. They have got enough problems. Somebody harking over their shoulders isn't a good idea.
Q: What advice would you give Yellen, who has served the Fed as a board member, president of the San Francisco regional bank and since 2010 as vice chair?
A: I had a learning curve on a lot of different aspects of how the Fed operates. Janet clearly doesn't need that. Don Kohn (a longtime Fed staffer and vice chairman) mentored me through the early stages.
Q: The size of the Federal Reserve's balance sheet stands at a record $3.7 trillion, reflecting all the Treasurys and mortgage-backed securities the Fed has bought to push long-term interest rates down. You have expressed concerns about this size, which is more than four times where the balance sheet stood before the start of the financial crisis. What are your worries?
A: My basic concern is that we have to rein this thing in well before the demand for funds picks up and makes it very difficult to rein in. (Inflation) is not immediate. It is down the road. But historically, there are no cases where central banks blow up their balance sheets or where countries print money which doesn't hit (with higher inflation).
Q: You write that our highest priority should be to fix our broken political system. How?
A: Unless you are willing to compromise, society cannot live together. What is happening now is an increasing proportion of positions are getting beyond the point where the system can effectively hold together. I am concerned about it. It's not long ago when a Howard Baker and Bob Dole and Daniel Patrick Moynihan and Lloyd Bentsen spoke to each other. In the Ford administration, Jerry Ford used to be at Tip O'Neill — toe to toe, bang, bang — and then Tip would come over to the West Wing at 6 o'clock and have a bourbon with Jerry. That's what I mean that the system is broken. We have got to find a way back to the comity that we had not that long ago.
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Original headline: Greenspan mulls roots of crisis he didn't foresee
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