by Frank James
Alan Greenspan, the former Federal Reserve chairman, told Congress today his belief of 40 years, that banks and other financial institutions would only act in their self interest and never do anything so aggressively stupid as to make loans to people who couldn't repay them or take on other sizable risks that could sink them was, er, flawed.
Rep. Heny Waxman, chairman of the House Oversight and Government Affairs Committee, pulled a Tim Russert on Greenspan, at a hearing today, reading quotes Greenspan had made in the past knocking regulation which today probably had the former central banker flinching inside.
WAXMAN: The question I have for you is, you had an ideology. You had a belief that free competitive and this is your statement, 'I do have an ideology that free, competitive markets are by far the unrivaled way to organize economies. We tried rewgulation. None meaningfully worked.' That was your quote. You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others. And now the whole economy is paying the price. Do you feel that your ideology pushed you to make decisions that you wish you had not made?
GREENSPAN: Well remember that what an ideology is is a conceptual framework with the way people deal with reality. Everyone has one. To exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is yes, I've found a flaw, I don't know how significant or permanent it is, but I've been very distressed by that fact...
Waxman: You found a flaw in the reality...
Greenspan: Flaw in the model that I perceived as the critical functioning structure that defines how the world works.
Waxman: In other words, you found that your view of the world, your ideology was not right.
Greenspan: Precisely. That's precisely the reason I was shocked because I had been going for 40 years or more with very considerable evidence that it was working rather well.
In his prepared statement, Greenspan said his worldview was rocked by what's happened, which is what Waxman zeroed in on. Here's the key excerpt:
As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets' state of balance. If it fails, as occurred this year, market stability is undermined.
Greenspan has drawn a lot of criticism for the financial-markets crisis.
Rep. Barney Frank who chairs the House Financial Services Committee has blamed Greenspan for not regulating mortgages under the Homeowners Equity Protection Act which Congress passed in 1994 which would have allowed mortgage markets to be regulated across the board.
His economist colleagues point to Greenspan for holding key interest rates too low for too long earlier this decade, allowing cheap money to fuel the speculative bubble.
Greenspan wasn't willing to take the fall today for all of that. But it was clearly a chastened man as he testified before Congress today.
Comments
Now I understand why they are called "right-wingers." They are so convinced they are right there is no space left in their brains to even consider that they may NOT be right. See "trickle-down economics" and "WMD" for just a couple of other examples. Also add in a bunch of Swamp contributors who stick by long-held beliefs in spite of the facts.
Posted by: Kenneth Janowski | October 23, 2008 1:42 PM
This guy was considered a saint in the Wall St. Journal and national business publications when he was Federal Reserve chairman. He is one of the shrewdest, most highly educated and revered chairmen we have ever had, yet he couldn't anticipate the human capacity for greed or the need to regulate it. Let's hope Bernanke has the ability to reflect that his best hunch may be wrong. Calling for regulation now is a little late, but he may be the only one republicans will listen to.
Posted by: Grandblvd03 | October 23, 2008 1:56 PM
For how many years did Greenspan go along with the Bush deficit spending for the Bush/Cheney Iraq invasion and Iraq occupation? Greenspan could have done much to prevent such a high federal deficit. Mrs. Greenspan-Andrea Mitchell has never recognized this fact in any of her news reporting.
Posted by: Vivian | October 23, 2008 2:10 PM
Ah yes, the founder of the feast....
Posted by: C.Hussein.Morris | October 23, 2008 2:23 PM
Wonder what MSNBC liberal reporter Andrea Mitchell thought about her liberal politician friends trying to tag her hubby with the blame for this mess?
Posted by: vla | October 23, 2008 2:32 PM
What he is saying is that the banks have backed themselves into a corner with derivatives and the population has been stripped of its wealth. Even though he knows this, he can't allow his train of thought to take the next logical step which is, instead of giving the banks more money, give the money back to the population.
http://ewebsmith.com/bus/taxpayers.html
Posted by: Web Smith | October 23, 2008 2:44 PM
When my brother gave me a gift few years ago, Greenspan book, I have returned the book to him telling him that I do not trust Greenspan and that he is incompetent. To raise and lower the interest rate 14 times in order to get the inflation and recession in check every one can do that you do not have to be smart or economist. Seeing the greed of the executives on wall street and the openness of the risks they took with the money of hard working people and not doing anything about it Greenspan himself have to be send to prison.
Posted by: Yoel Cohen | October 23, 2008 2:51 PM
How many years did us "liberals" have listen to Greenspan's obtuse voodoo-speak...and wonder if this guy had any grasp on reality at all? Way too many, and now I feel somewhat vindicated in suspecting that this senile old lizard was guiding the ship up onto the rocks. For an economist of his supposed stature not to understand the basic human trait of greed and unbridled self-interest is beyond comprehension.
Posted by: Ignatz | October 23, 2008 2:58 PM
And McCain wanted to deify the guy:
During Greenspan's tenure at the Fed, McCain once joked that his role in inspiring confidence in the economy was so vital that if the Fed chief were to die in office he would put dark sunglasses on him and "prop him up" as was done to a deceased character in the 1989 movie "Weekend at Bernie's."
Maybe McCain can ask Haslett (Dow 36,000) if the Dow will hit 8,000 today, going the wrong way.
Posted by: dt | October 23, 2008 3:07 PM
via-Greenspan's a Republican and I could care less what Andrea Mitchell thinks.
Posted by: dt | October 23, 2008 3:09 PM
Waxman is chasing his tail (again) and Greenspan is, well, lying. The over-the-counter derivative market and its so-called lack of regulation are not to blame. Greenspan knows this. We've had derivatives for more than a century now, and derivative contracts in real estate for several decades (at least). Derivatives work like anything else that depends on the quality of the underlying product. If you put garbage in, you get garbage out. Thus, the problem would not have occurred had the mortgages bundled into derivative pools not been toxic. That, in turn, points back to the loose and predatory sub-prime lending practices of financial institutions as one of the main root causes.
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Greenspan also knows (or should know) that the Federal Reserve Bank's lowered lending rates since 9/11 created the moral hazard of excess speculation and loose lending practices in the sub-prime market. The same thing happened in the lead-up to the Great Depression when the FRB intentionally inflated the money supply to keep Great Britain and the European economy afloat. Were it not for the extended period of time that the FRB kept money cheap during the beginning of this century, the temptation to make risky loans on such bad terms would simply not have existed. It is largely because of the total interaction between the FRB's lower lending rates and the subprime market that the housing bubble was both sustained and expanded until its shaky foundations made it burst. The worst part is that Greenspan not only had the power to control the problem through the manipulation of interest rates, he also had the ability to regulate - to "prevent irresponsible lending practices that led to the subprime mortgage crisis" - as Waxman pointed out. Thus, Greenspan's attempt at palming the blame off onto the derivative market is a lie twice over.
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The fact is that the Federal Reserve Bank has done an irresponsible job of regulating the money supply throughout its entire existence. Worse, neither Congress nor the President nor any of his agents have oversight powers to countermand bad decisions of the FRB or call the FRB to account for them. If we are going to have a system of fiat currency - like we do - then it behooves us to make a politically accountable part of the government responsible for our money supply. If not, then we should simply scrap fiat currency and go back to a fractional gold standard. Either way, the FRB, as currently constituted, cannot continue to exist.
Posted by: John W. | October 23, 2008 4:22 PM
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Posted by: dt | October 23, 2008 3:09 PM
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That Republican served as FRB Chairman during both of Clinton's terms.
Posted by: John W. | October 23, 2008 4:25 PM
Posted by: dt | October 23, 2008 3:09 PM
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That Republican served as FRB Chairman during both of Clinton's terms.
Posted by: John W. | October 23, 2008 4:25 PM
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Yeah, those were the good old days, weren't they?
Posted by: Kenneth Janowski | October 23, 2008 5:23 PM
Government + the federal reserve is the problem. Greenspan and the FED wrecked the US dollar, the retirements of Americans, priced Americans out of a home all due to artificially lowering the interest rates so their beneficiaries could get cheap money at the expense of American citizens. The federal reserve is a private corporation, whose stock is owned by private individuals. Who would never sell it to you or I for they are a corporation who has been given a monopoly over the money supply. Congress not date criticize them for they cower to money. Except Ron Paul. The only congressmen to stand up to the federal reserve in history.
Thomas Jefferson: "If the American people ever allow the banking system to control their money, first by inflation, then by deflation; their children will one day wake up homeless on the continent their fathers conquered."
Posted by: Andrew Jackson | October 23, 2008 6:22 PM
that's why he's named GREEN-SPAN, he SPANNED the world with GREEN buck$$$. in time, more and more people might feel that they've been GREEN-SPAMMED
Posted by: bamboo | October 23, 2008 11:08 PM
What I don't understand is- if I make a financial mistake it's my own tough luck and I have to eat my loss, but a multimillionaire gets bailed out. If it is as so many say that in this country we sink or swim by our own merits then all the people that made bad choices, weather it is the big guys or the little guys, they should eat their loss too. Sorry for those who bought a house they couldn't afford.
Posted by: oldbones | October 24, 2008 9:15 AM
"Yeah, those were the good old days, weren't they?"
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Posted by: Kenneth Janowski | October 23, 2008 5:23 PM
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Yes and no. Bill Clinton functioned like an old-school, pre 1972 type Democrat . Somewhere between his fiscal conservatism and the gridlock created by a Congress filled with truly conservative Republicans (which appears to be nearly an extinct species), just enough got done to make the federal government more of a benefit than a burden. On the other hand, one of the big problems that can still kill us (e.g. looming insolvency due to trillions in future Social Security and Medicare debt) was being dealt with as though it did not exist. So, yes, while the government managed to do some good things during Clinton's tenure, it still failed us big-time.
Posted by: John W. | October 24, 2008 10:15 AM