Greenspan testifies free market flaw caused meltdown

(AP) - Former Federal Reserve Chairman AlanGreenspan, describing the current financial crisis as a"once-in-a-century credit tsunami" acknowledged Thursday that thecrisis has exposed flaws in his thinking

News 12 Staff

Oct 23, 2008, 5:53 PM

Updated 5,742 days ago

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(AP) - Former Federal Reserve Chairman AlanGreenspan, describing the current financial crisis as a"once-in-a-century credit tsunami" acknowledged Thursday that thecrisis has exposed flaws in his thinking and in the workings of thefree-market system.
Greenspan told the House Oversight Committee that his beliefthat banks would be more prudent in their lending practices becauseof the need to protect their stockholders had been proven wrong bythe current crisis. He called this a "mistake" in his views andsaid he had been shocked by that.
Greenspan said he had made a "mistake" in believing that banksin operating in their self-interest would be sufficient to protecttheir shareholders and the equity in their institutions.
During questioning, Greenspan was challenged about variousstatements he had made during the five-year housing boom includingforecasts that it was unlikely that there would be a nationwidecollapse of home prices.
Greenspan said he had failed to predict a significant decline inhome prices because the country had never experienced such adecline before.
Greenspan said that the current crisis had "turned out to bemuch broader than anything that I could have imagined."
The committee called Greenspan to testify along with formerTreasury Secretary John Snow and Securities and Exchange CommissionChairman Christopher Cox as lawmakers sought to discover ifregulatory failings had contributed to the crisis.
House Oversight Committee Chairman Henry Waxman said that hebelieved that the Federal Reserve, which regulates banks, the SECand the Treasury had all played a role in contributing to themistakes.
"Given the financial damage to date, I cannot see how we canavoid a significant rise in layoffs and unemployment," Greenspansaid. "Fearful American households are attempting to adjust, asbest they can, to a rapid contraction in credit availability,threats to retirement funds and increased job insecurity."
Greenspan said that a necessary condition for the crisis to endwill be a stabilization in home prices but he said that was notlikely to occur for "many months in the future."
Greenspan did not specifically address the criticism he isreceiving now as being partly to blame for the current crisis.
Greenspan's critics charge that he left interest rates too lowin the early part of this decade, spurring an unsustainable housingboom, while also refusing to exercise the Fed's powers to imposegreater regulations on the issuance of new types of mortgages,including subprime loans. It was the collapse of these mortgagesand rising defaults a year ago that triggered the current crisis.
In his testimony, Greenspan put the blame for the subprimecollapse on over-eager investors who did not properly take intoaccount the threats that would be posed once home prices stoppedsurging upward.
"It was the failure to properly price such risky assets thatprecipitated the crisis," Greenspan said.
Greenspan called this "a flaw in the model that I perceived isthe critical functioning structure that defines how the worldworks." "The list of mistakes is long and the cost to taxpayers isstaggering," Waxman, D-Calif., told the three men. "Ourregulators became enablers rather than enforcers. Their trust inthe wisdom of the markets was infinite. The mantra became thatgovernment regulation is wrong. The market is infallible." When home prices finally stabilize, Greenspan said, then "themarket freeze should begin to measurably thaw and frightenedinvestors will take tentative steps towards re-engagement withrisk."


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