Greenspan Says He Was Wrong On Regulation
Friday, October 24, 2008
Alan Greenspan, once viewed as the infallible architect of U.S. prosperity, was called on the carpet yesterday, pilloried by a congressional committee for decisions that contributed to the financial crisis devastating world markets.
The former chairman of the Federal Reserve said the crisis had shaken his very understanding of how markets work, and agreed that certain financial derivatives should be regulated -- an idea he had long resisted.
When he stepped down as Fed chairman less than three years ago, Congress treated Greenspan as an oracle, one of the great economic statesmen of all time. Yesterday, many members of the House Oversight and Government Reform Committee treated him as a hostile witness.
"You found that your view of the world, your ideology was not right, it was not working?" said Rep. Henry A. Waxman (D-Calif.), the committee chairman.
"Absolutely, precisely," Greenspan said. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."
Greenspan alternately defended his legacy and acknowledged mistakes. Waxman asked whether the former chairman was wrong to consistently oppose regulating the multitrillion dollar derivative market that has contributed to the financial crisis.
"Well, partially," said Greenspan, before stressing the difference between credit-default swaps and other types of derivatives.
With the global financial system unraveling, economists and political leaders are coming to doubt some of Greenspan's most closely held views: that markets can exact self-discipline, that central bankers should generally not try to prick bubbles in the price of houses or tech stocks, that a policymaker's most powerful tool to encourage growth is to stay out of the way.
Even Greenspan seemed genuinely perplexed yesterday by all that had happened, hard-pressed to explain how formerly fundamental truths about how markets work could have proved so wrong.
Members of Congress who not long ago would seek Greenspan's blessing for their preferred public policies were at turns combative and disdainful. Rep. John Yarmuth (D-Ky.) called him a "Bill Buckner," referring to the Boston Red Sox first baseman who missed an easy ground ball against the Mets in the 1986 World Series, costing the team the game.
The tough talk reflected a widening sense that some of Greenspan's apparent successes in managing the economy from 1987 to 2006 were in fact illusory, that they came at the cost of building the biggest credit bubble in world history.
"Markets and societies move on belief systems," said James Grant, editor of Grant's Interest Rate Observer and a longtime critic of Greenspan. "The belief system of finance featured the notion that someone with unusual power to see around corners and through walls and into the future was running things, and that someone was Alan Greenspan."