Greenspan reflects on crisis, deflects blame
Thursday, April 8, 2010
Police in the Rayburn House Office Building had been planning an evacuation drill for Wednesday morning, but they called it off after realizing that it would interrupt Alan Greenspan's testimony to the commission investigating the financial meltdown.
The cops needn't have worried about involving the former Fed chairman in the evacuation: Greenspan is a master of escape -- particularly escaping blame.
As Fed chairman, he reassured policymakers that everything was fine as he presided over the housing bubble that led the world economy off a cliff. Now we know that everything wasn't fine -- Greenspan himself called the financial crisis "the most severe in history" -- and the 84-year-old wise man is claiming he knew it all along.
"I warned of the consequences of this situation in testimony before the Senate banking committee in 2004," he informed the commissioners Wednesday. "In 2002 I expressed concern . . . that our extraordinary housing boom, financed by very large increases in mortgage debt, cannot continue indefinitely."
While finding himself blameless, he assigned fault to, among others, Congress, the Bush and Clinton administrations, Fannie Mae and Freddie Mac, the Europeans, other regulators, and one of his Fed colleagues. They all contributed to what Greenspan, in his testimony, called "the most prominent global bubble in generations."
It was, as the commission chairman, Phil Angelides, suggested, an elaborate case of "rewriting or forgetting history." In fact, the Maestro spent a good bit of time fiddling while the bubble inflated. Here's what he had to say to Congress's Joint Economic Committee in June 2005:
"A bubble in home prices for the nation as a whole does not appear likely."
"Home price declines . . . were they to occur, likely would not have substantial macroeconomic implications."
"Nationwide banking and widespread securitization of mortgages make it less likely that financial intermediation would be impaired."
When the collapse finally came, Greenspan acknowledged "a flaw" in his philosophy that unfettered free markets are best and regulations don't work. But now that the economy has stabilized -- thanks to government interventions that conservatives deride as socialism -- he's decided he had it right after all. Though acknowledging that the banking system had been undercapitalized for half a century, Greenspan shook his head to indicate "no" when asked whether there should now be higher capital requirements.
Angelides pointed out the multiple warnings that Greenspan received, going back to 1999, about the need to crack down on predatory lending practices and subprime mortgages. He noted that Greenspan's regulatory responses "covered just 1 percent of the market," and he recalled Greenspan's resistance to regulating subprime lending by non-bank subsidiaries. "Would you put this under the category of 'Oops, should have done it?' " the chairman asked.
"The issue of retrospective and figuring out what you should have done differently is a really futile activity," Greenspan advised the commission, which is dedicated to just that. "I was right 70 percent of the time, but I was wrong 30 percent of the time."