Subprime crisis: Was Greenspan remiss?

Former Fed governor says Greenspan blocked proposal to crack down on subprime lending practices.

( -- Former Federal Reserve Governor Edward Gramlich claims that former Fed Chairman Alan Greenspan blocked a proposal to crack down on subprime lending practices back in 2000, according to The Wall Street Journal.

Gramlich, who was Fed governor from 1997-2005, says he proposed the idea to Greenspan personally, The Journal reported. He suggested that the Fed send examiners into offices of lenders that were units of Fed-regulated bank holding companies. He claims Greenspan - well-known for his deregulatory practices - rejected the idea.

"He was opposed to it, so I didn't really pursue it," says Gramlich, who is now a scholar at the Urban Institute.

Subprime lending practices - giving high-interest loans to individuals with poor credit history - became increasingly popular during the real estate boom of the last several years. But since 2006, subprime borrowers have been defaulting at alarming rates, putting downward pressure on the overall housing market.

The Democratic Congress is now pointing fingers at regulators - particularly the Fed - for failing to prevent the subprime fallout.

When asked about the proposal, Greenspan claimed he did not recall the specific conversation with Gramlich, but did confirm that he was opposed to the idea, for fear that "Fed-inspected" lenders might give borrowers a false sense of security.

Under current Chairman Ben Bernanke, the Fed has begun reviewing its practices in overseeing holding-company units. On Thursday the Fed will hold a public meeting on regulating subprime lending.  Top of page