washingtonpost.com
Greenspan reflects on crisis, deflects blame

By Dana Milbank
Washington Post Staff Writer
Thursday, April 8, 2010; A02

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."

"Would you put this in the 30 percent category?" Angelides asked.

"I don't know," Greenspan said. "I'd say certainly part of it I would."

But not too big a part. Under questioning from Bill Thomas, the vice chairman, Greenspan elaborated: "If we get it right 70 percent of the time, that is exceptionally good."

Public outrage has caused bankers to give up their drivers in favor of taxis when they come to Capitol Hill, but Greenspan arrived in his chauffeured black sedan. Clipped to his collar and dangling over his shoulder was the type of earpiece used in TV interviews. Attendance for the session was light (even two of the commissioners were missing), and Greenspan's statement had to be delayed while technicians tried to make his microphone work.

He quickly got to his blame list. Credit agencies "grossly inflated credit ratings." A Fed governor "chose not to bring those issues to the board." Lawmakers are suffering "a lot of amnesia" about their support for subprime lending. Mortgages were securitized as "a consequence of the demand coming largely from Europe."

Commissioner Brooksley Born, who led the Commodity Futures Trading Commission in the Clinton administration, invited Greenspan to help himself to some culpability. "The Fed utterly failed to prevent the financial crisis," Born said. "The Fed and the banking regulators failed to prevent the housing bubble. . . . They failed to prevent our biggest banks and bank holding companies from engaging in activities that would bring them to the verge of collapse."

The maestro's act was getting old, and it was about to reach an abrupt end. A few minutes later, there was a "pop" in the room and the place went dark, the microphones dead, the power out. "You all right?" somebody called out. Finally, staffers found and opened the curtains -- and Greenspan was exposed to the harsh light of day.

Said somebody at the press table: "It's the best disinfectant."

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