Thread: Greenspan "shocked" at credit system breakdown

Greenspan "shocked" at credit system breakdown
Thu Oct 23, 2008
By Mark Felsenthal



Greenspan in the hot seat

WASHINGTON (Reuters) - Former Federal Reserve Chairman Alan Greenspan told Congress on Thursday he is "shocked" at the breakdown in U.S. credit markets and said he was "partially" wrong to resist regulation of some securities.

Despite concerns he had in 2005 that risks were being underestimated by investors, "this crisis, however, has turned out to be much broader than anything I could have imagined," Greenspan said in remarks prepared for delivery to the House of Representatives Committee on Oversight and Government Reform.

"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," said Greenspan, who stepped down from the Fed in 2006.

With a general election looming November 4, U.S. lawmakers were sharply divided along political lines in either blaming regulators or bickering for failure to prevent the crisis that has gripped financial markets around the world.

"The reasons why we set up your agencies and gave you budget authority to hire people is so you can see problems developing before they become a crisis," Committee Chairman Henry Waxman, a California Democrat, told a panel that included Securities and Exchange Commission Chairman Christopher Cox and former U.S. Treasury Secretary John Snow.

"To say you just didn't see it, that just doesn't satisfy me," Waxman said.

Republicans, for their part, singled out government sponsored mortgage finance agencies Fannie Mae and Freddie Mac for their role in unsettling financial markets and faulted Congress, which has been led by the Democrats since 2006, for failing to pass measures to rein them in sooner.

They angrily protested a decision not to hold a hearing on the mortgage finance firms, which the government took over in September to restore financial health, until two weeks after the election.


"PARTIALLY" WRONG

Greenspan softened his longstanding opposition to many forms of financial market regulation, acknowledging in an exchange with Waxman that he was "partially" wrong in his belief that some trading instruments, specifically credit default swaps, did not need oversight.

Waxman cited a series of public statements by Greenspan saying the market could handle regulation of derivatives without government intervention.

"My question is simple: Were you wrong?" Waxman asked.

Greenspan said he was "partially" wrong in the case of credit default swaps, complex trading instruments meant to act as insurance against default for bond buyers.

While Greenspan was once hailed as one of the most accomplished central bankers in U.S. history, the low interest rates during his final years at the Fed have been blamed for fueling the housing bubble and eventual crash that touched off the current financial crisis.

His strong advocacy for limited regulation of financial markets has also been called into question as a result of the crisis.

The former Fed chair said that a securitization system that stimulated appetite for loans made to borrowers with spotty credit histories, was at the heart of the breakdown of credit markets.

"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," he said.

A surge in demand for U.S. subprime securities, supported by unrealistically positive ratings by credit agencies, was the core of the problem, he added.

Greenspan proposed that that securitizers be required to retain "a meaningful part" of securities they issued. He said that regulatory reform will be necessary in the areas of fraud, settlement, and securitization to re-establish financial stability.

He backed the recently approved $700 billion bailout package, saying that without it, banks and other financial institutions would likely face a serious reduction in credit.


"DOG AND PONY SHOW"

Lawmakers from both parties also took advantage of the packed hearing room to take some political potshots. Democrats assailed gaps in rules and oversight while Republicans faulted Fannie Mae and Freddie Mac for exacerbating credit market strains.

"For too long, the prevailing attitude in Washington has been that the market always knows best," said Committee Chairman Waxman, a Democrat.

Republicans circulated an October 20 letter asking for a government investigation of alleged fraud and mismanagement at the mortgage firms.

"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, a Florida Republican.

But Greenspan told lawmakers that regulators could not predict the future or make perfect decisions.

"It's a very difficult problem with respect to supervision and regulation," he said. "We cannot expect perfection in any area where forecasting is required. We have to do our best but cannot expect infallibility or omniscience," he added.

(Additional reporting by Kim Dixon)
(Reporting by Mark Felsenthal; Editing by Gary Crosse)

reuters.com

Great idea, let's blame Greenspan for everything.

I need a bonus for that suggestion.

Greenspan was the same man back in early 2000's who said that derivatives are great for spreading the risk around. But the aggregate risk becomes too great as they are out of control blind risk. High fliers who left the big party before it crashed got to thank Greenspan big time for making that party the biggest ever. If it is one hell of a party then it is going to be one hell of a mess.

The whole financial system is simply a Ponzi scheme and it is breaking down now. It is like 10 to 20 years of crazy leveraging then it is going to take long time to deleverage everything.

I've let loose on Greenspan already, and I can claim some credit for having pointed out the lunacy of his policies several years ago.

But ultimately he reported to the US Congress (supposedly, lets not delve into the Fed right now), and the political system should have reined him in around 2003-4.

Voters are part of political system and they did not do their job as well. They are like more interested in their hometown NFL football team than what their rep/senator up to in DC. Voters are still blind to the real issues so we ll see the circus of blame game goes on.

I am shocked that Greenspan is shocked by the fact that if you keep pumping up a bubble it will eventually pop. My daughters had worked that out by their first birthday.

Greenspan, to me at least, represented the 'best brains' on the block for a long, long time. Warts & all, he steered the US through many ups & downs.

His successor, academic Bernanke, needs to carry a fair portion of the blame, as does Bush & his idiotic policies. Were Greenspan still to have been at the helm, I sincerely doubt that the wild market swings & sentiments would have been as pronounced.

Would be a good idea to bring him back to assist Bernanke a little, in this time of crisis.

Always thought Greenspan was a twat .... seems I was correcto.

Originally Posted by jhc

Voters are part of political system and they did not do their job as well. They are like more interested in their hometown NFL football team than what their rep/senator up to in DC. Voters are still blind to the real issues so we ll see the circus of blame game goes on.

Most likely true. Did you go to a special political school or did you figure this out between beers watching an NFL game

Fed Chairman is a very political job, Greenspan, despite being a fool, was under a lot of pressure to say exactly what he was expected to say, I don't think anyone with a brain would have done otherwise,

basically, everyone loved him then because he was saying what they wanted to hear, and that was the voice of "reason"

confronting Congress or the President with the sad reality of the system would have made him a lot of ennemies and eventually forced him to quit or not be nominated again by the commitee,

blame the public for drinking the Kool Aid because at the end their sheer ignorance is what put us into this big mess,