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Greenspan Says He Was Wrong On Regulation
"His reputation was as inflated as were house prices in the early 2000s and tech stocks in the late 1990s," Grant said.
Greenspan repeatedly used his control over the levers of the economy -- especially cutting interest rates -- to deal with problems. When the financial system in many emerging countries imploded in 1998, he cut rates to protect the U.S. economy. When the dot-com bubble burst, he used the same tack, even more aggressively.
Indeed, the housing bubble, which was fueled by low interest rates, helped keep the 2001 recession relatively mild, as construction and other real estate-related activity soared in the first several years of this decade.
But Greenspan's actions to keep the economy on an even keel may have made lenders complacent about risk, one of the factors that led them to expand lending in irresponsible ways. He acknowledged in testimony yesterday that the crisis is also a result of the fact that lenders base their models of credit risk on a 20-year period in which home prices were rising and the economy was strong.
Economists are increasingly rethinking their views on whether central bankers should try to combat bubbles in the prices of assets, though not necessarily by using their power to set interest rates.
"When bubbles cause huge problems is when they cause the financial sector to seize up," said Frederic S. Mishkin, a Columbia University economist and, until recently, Fed governor. "The right way to deal with that kind of bubble is not with monetary policy," but with bank supervision and other regulatory powers.
Greenspan himself stressed the challenge of predicting the evolution of economic conditions.
"The Federal Reserve had as good an economic organization as exists," Greenspan said. "If all those extraordinarily capable people were unable to foresee the development of this critical problem . . . we have to ask ourselves: Why is that? And the answer is that we're not smart enough as people. We just cannot see events that far in advance."
But he deflected criticism, too.
Responding to charges that the Fed did not regulate subprime lending aggressively enough, Greenspan said: "I took an oath of office when I became Federal Reserve chairman. . . . I said that I am here to uphold the laws of the land passed by the Congress, not my own predilections. . . . I think you will find that my history is that I voted for virtually every regulatory action that the Federal Reserve Board moved forward on. . . . And I was doing so because I perceived that that was the will of the Congress."
In fact, it is almost unheard of for the Fed to move forward on regulatory policy if the chairman disagrees, and Congress at the time was often deferential toward Greenspan on financial regulation. In his time in office, Greenspan wielded both official and unofficial powers with an effectiveness that few other central bankers have matched.
While endorsing some expanded regulation yesterday, such as requiring the companies that combine large numbers of loans into securities to hold on to significant numbers of those securities, he also repeatedly retreated to his libertarian-leaning roots, and warned of the dangers of overreacting.
"We have to recognize that this is almost surely a once-in-a-century phenomenon," Greenspan said, "and in that regard, to realize the types of regulation that would prevent this from happening in the future are so onerous as to basically suppress the growth rate in the economy and . . . the standards of living of the American people."
Greenspan used the word "mistake" once during the five-hour hearing, which also included former Treasury secretary John Snow and current Securities and Exchange Commission Chairman Christopher Cox.
"I made a mistake," Greenspan said, "in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."