In a surprise about-face that potentially wrecks his legacy, Alan Greenspan yesterday admitted his ideology when running the US central bank was “flawed” in encouraging the economy’s wild ride of booms and busts for 20 years.
The 82-year-old former head of the Federal Reserve reluctantly shot down his own philosophy, but only after being roughed up by angry members of a congressional panel probing the economic meltdown.
The panel’s head, Rep. Henry Waxman (D-Calif.), led the charge. “You found that your view of the world, your ideology was not right, it was not working?”
Greenspan answered, “Absolutely, precisely. You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”
At one point Greenspan turned contrite. “I have found a flaw. I don’t know how significant or permanent it is. But I have been very distressed by that fact.”
Pressed by Waxman on what Greenspan saw as his biggest mistake at the helm of the Fed, the former chairman said, “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”
As a result, he said, “Free markets did break down. And I think that, as I said, shocked me.
“I still do not fully understand why it happened. And obviously to the extent that I figure out where it happened, and why, I will change my views. And if the facts change, I will change,” he said.
Greenspan said the current crisis has “turned out to be much broader than anything that I could have imagined.”
Other members of the House Committee on Oversight and Government Reform took issue with Greenspan’s long list of actions resisting regulatory crackdowns, dating back to Greenspan’s early days after taking charge of the Fed in 1987.
Most of the panel’s ridicule was for Greenspan’s refusal to support any firm regulation, based on his controversial comments in a 2006 sheet that “regulation generally has proved far better at constraining excessive risk-taking than has government regulation.”
Greenspan threw part of the blame on Wall Street investment banks, rating agencies and loan originators for pumping up the mortgage market to reap huge profits, particularly starting in 2005 with a rash of unqualified buyers.
“Without the excess demand from securitizers, subprime mortgage originations – undeniably the original source of crisis – would have been far smaller and defaults, accordingly, far fewer,” Greenspan said.
Some panel members weren’t satisfied.
“This is a nice dog-and-pony show and maybe it’s theater, but people want someone held accountable, they want someone to go to jail,” said Rep. John Mica (R-Fla.).
Following the hearings, a long line of pundits and market watchers chimed in with their I-told-you-so comments.
“Greenspan is finally taking some responsibility for his actions,” said former Fed official Paul Kasriel, director of economic research at Northern Trust Co.”