Greenspan Testifies, Blames Others For Crisis

To my knowledge Greenspan does not play the fiddle.

Today Alan Greenspan put on an impresario performance of blame-shifting, finger-pointing, and buck-passing as he testified before the Financial Crisis Inquiry Commission regarding the Federal Reserve’s role in the financial crisis.  Unsurprisingly,  Greenspan defended the Fed, which he ran for almost twenty years, saying that while mistakes were made, it was not loose-money policy and anti-regulatory stance that lead to the crisis.  Greenspan claimed that subprime loans were not “a significant cause” of the financial crisis. He placed the blame for the crisis on financial firms and credit-rating agencies.

Greenspan testified that the Fed warned Congress about the risks of subprime lending and low-down-payment mortgages in 1999 and 2001.  He testified that the Fed warned that Fannie Mae and Freddie Mac posed risks to the entire financial system.  Greenspan said the if Fed attempted to slow growth in the housing market “the Congress would have clamped down on us”. Greenspan further said “There is a lot of amnesia that’s emerging, apparently”.  These comments are especially interesting because the Federal Reserve is supposed to be an apolitical body, independent of Congress.

Brooksley Born, one of the committee members as well as a former chair of the Commodity Futures and Trading Commission (Born has clashed with Greenspan before, notably over derivatives regulation in the 1990s) asked Greenspan the pointed question: “Didn’t the Federal Reserve fail to meet its mandates, fail to meet its responsibilities”? She said the Fed “failed to prevent the housing bubble, they failed to prevent the predatory lending scandal, they failed to prevent our biggest banks and holding companies from engaging in activities that would bring them to the verge of collapse without massive taxpayer bailouts”.

Greenspan responded that he did not believe his views on regulation were “predominant and effective at influencing the Congress”.  This comment strikes me as being utterly spurious, as it seemed that investors and politicians hung on every word Greenspan said for much of his tenure.  When he famously remarked that “irrational exuberance has unduly escalated asset values”, stock prices plummeted.

Ultimately Greenspan said that increased capital requirements for banks, and increased collateral requirements for financial traders are crucial to averting future crises.  Greenspan said that the idea that a business is too big to fail “cannot be allowed to stand”.  He continued: “The productive employment of the nation’s scare saving is being threatened by financial firms at the edge of failure, supported with taxpayer funds, designated as systemically important institutions”.

For the most damning criticism of Greenspan and his role in the financial crisis, I highly recommend Michael Burrey’s recent op-ed piece in the New York Times.  Burrey ran the hedge fund Scion Capital and made billions of dollars betting on the subprime housing meltdown.

Who do you think bears the ultimate responsibility for the economic crisis?  Join the discussion below.