JIM LEHRER: Judy Woodruff has our financial crisis story tonight.
JUDY WOODRUFF: The former chair of the Federal Reserve and one of the best-known names in finance returned to Capitol Hill today for the first time since the financial crisis began.
Alan Greenspan, who headed the Fed for 18 years, until early 2006, appeared with the chairman of the Securities and Exchange Commission, Chris Cox, and former Treasury Secretary John Snow, at a hearing examining the role of federal regulators in the current crisis.
ALAN GREENSPAN, Former Federal Reserve Chairman: We are in the midst of a once-in-a-century credit tsunami. Central banks and governments are being required to take unprecedented measures.
JUDY WOODRUFF: Greenspan has been criticized for decisions he made earlier this decade that some economists charge helped to foster the housing bubble.
REP. HENRY WAXMAN (D), California: And my question for you is simple: Were you wrong?
ALAN GREENSPAN: Partially.
JUDY WOODRUFF: Democrats on the committee, led by the chairman, Henry Waxman of California, pressed Greenspan on whether his fundamental economic philosophy was mistaken.
REP. HENRY 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. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We’ve tried regulation. 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 our whole economy is paying its price.
Do you feel that your ideology pushed you to make decisions that you wish you had not made?
ALAN GREENSPAN: Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to — 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 found a flaw. I don’t know how significant or permanent it is, but I’ve been very distressed by that fact.
REP. HENRY WAXMAN: You found a flaw in the reality…
ALAN GREENSPAN: Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
REP. HENRY WAXMAN: In other words, you found that your view of the world, your ideology, was not right, it was not working?
ALAN GREENSPAN: That is — precisely. No, 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 exceptionally well.
JUDY WOODRUFF: When he was Fed chair, Greenspan made many appearances before congressional committees and was generally treated with deference. His opinion was widely sought and his words heeded.
But today, in the aftermath of the financial meltdown, Greenspan faced a much rougher reception from Democrats.
Ohio’s Dennis Kucinich.
REP. DENNIS KUCINICH (D), Ohio: ÂNow, Mr. Greenspan, before the collapse of the housing bubble, didn’t you also say that the U.S. has not experienced housing slumps to justify your policy that there would be no bubble? And can you tell this committee when it occurred to you that there was a housing bubble?
ALAN GREENSPAN: I knew — the housing bubble became clear to me sometime in early 2006, in retrospect. I did not forecast a significant decline because we had never had a significant decline in prices.
And it’s only as the process began to emerge that it became clear that we were about to have what essentially was a global decline in home prices.
JUDY WOODRUFF: Republicans sought to shift the focus to the role of Fannie Mae and Freddie Mac, the government-backed mortgage entities in the crisis.
Idaho Republican Bill Sali asked SEC Chair Cox whether those responsible for the crisis will pay a price.
REP. BILL SALI (R), Idaho: Are the people that have caused this, is somebody going to go to jail?
CHRISTOPHER COX, Chairman, Securities and Exchange Commission: There is no question that, somewhere in this terrible mess, many laws were broken. Right now, the criminal authorities and the civil authorities, not only in the federal government and the state governments, but in other countries, because this is now, as you know, a matter of intense international focus, are working to make sure that lawbreakers are held accountable and people are brought to justice.
JUDY WOODRUFF: Greenspan and Cox contended regulators cannot predict crises. Chairman Waxman took issue with that.
REP. HENRY WAXMAN: Well, I want smart regulation. But I want to point out that what I’m hearing from our witnesses today is that they just didn’t know. They couldn’t make projections about what the future was or they’re not always right.
The truth of the matter is that there were a lot of warning signs. The reasons why we set up your agencies and gave you budget authority to hire people is so that you can see problems developing before they become a financial crisis.
To tell us afterwards, when we are now faced with the disaster that we’re seeing, that you couldn’t have foreseen it just doesn’t satisfy me.
JUDY WOODRUFF: Greenspan, who was once dubbed the Oracle in the world of finance, said his predictive powers were limited.
ALAN GREENSPAN: So it strikes me that, if you go back and ask yourself how in the early years anybody could realistically make a judgment as to what was ultimately going to happen to subprime, I think you’re asking more than anybody is capable of judging.
And we have this extraordinarily complex global economy, which as everybody now realizes is very difficult to forecast in any considerable detail.
And, Mr. Chairman, I know — I agree with you in the fact that there were a lot of people who raised issues about problems emerging, but there are always a lot of people raising issues, and half the time they’re wrong. And the question is, what do you do?
I mean, you point out quite correctly that the Federal Reserve had as good an economic organization as exists, and I would say, in the world. If all those extraordinarily capable people were unable to foresee the development of this critical problem, which undoubtedly was the cause of the world problem with respect to mortgage-backed securities, I have to — I think we have to ask ourselves, why is that?
And the answer is that we’re not smart enough as people. We just cannot see events that far in advance. And unless we can, it’s very difficult to look back and say, why didn’t we catch something?
Forecasting the crisis
JUDY WOODRUFF: To get some perspective on today's hearing and what was revealed, we get the views of two people who've watched the Fed closely over the years, one from the inside and one from the outside.
Alice Rivlin served as vice chair of the Federal Reserve in the late 1990s. Also a former director of the Office of Management and Budget under President Clinton, she's now a senior fellow at the Brookings Institution.
And John Cassidy, he's a staff writer at the New Yorker and contributing editor at Conde Nast Portfolio. He has covered Alan Greenspan for both magazines.
Thank you both for being with us.
Alice Rivlin, to you first. When Alan Greenspan says we were just not smart enough, no one was smart enough to be able to forecast what was going to happen, first of all, do you agree with him?
ALICE RIVLIN, Former Vice Chair, Federal Reserve Board: Not completely. I think what we failed to do was look at where the incentives in our system were going to get us into trouble.
Now, one was in subprime mortgages. We were not regulating the lenders that were putting out a lot of bad loans, in retrospect.
JUDY WOODRUFF: So you think that information wasn't available?
ALICE RIVLIN: Well, no, I think it was available. These institutions were not federally regulated banks, mostly. They were mortgage lenders who were regulated by the states, if at all.
But as this housing bubble grew and took off, lenders were making a lot of loans that they shouldn't have made. And borrowers were borrowing when they shouldn't have made them.
And then there was another complication, several more, but these loans were being packaged and sold to somebody else to be backing for mortgage-backed securities.
Now, in the old days, the lender really had to watch out that he wasn't making a bad loan because he might not get repaid. But in this new world, he didn't have to worry about that. He could sell this loan to somebody else and then take the money and make another loan. So we got the incentives wrong there.
JUDY WOODRUFF: So you're saying that the information was there and people did have -- should have known better, is basically what you're -- let me bring John Cassidy in.
How significant is it, this statement by Mr. Greenspan that people just didn't know enough to do anything about it?
JOHN CASSIDY, The New Yorker/Portfolio Magazine: Well, it was a remarkable appearance all told, if you think back to 10 years ago, even 5 years ago, how, you know, in what awe Greenspan was held. I covered a lot of hearings on the Hill, and he was treated with great deference, as your report said.
But actually I think he didn't really change his tune that much. During the speculative bubble of the '90s, he used to say, "This is too complicated. Nobody can really understand if it is a bubble."
Then we had a second bubble, the housing bubble, which was obviously linked to the subprime problem. And now he's saying, "Well, that was too complicated, too. Nobody could really understand that, either."
Now, if you think about that, what he's really saying is, you know, he's the top regulator in the country. He's the head of the central bank, but he can't really do anything about the major problems in the economy.
And I think, you know, that's just pushing it a bit.
Blame belongs to many
JUDY WOODRUFF: So, Alice Rivlin, is this essentially what Alan Greenspan has said before, we just didn't hear it clearly enough?
ALICE RIVLIN: I don't think so. And I wouldn't be as harsh as Mr. Cassidy. We can't blame all of this on one person. There was blame to go around.
We were victims, the whole country, of a collective delusion that housing prices would keep on going up. And I think we lost control of our common sense.
Many people who bought mortgage-backed securities, who bought other securities that were related to them, didn't ask one simple question, which was, what happens to the value of these securities when housing prices go down, as they eventually would?
Now, Mr. Greenspan said that today, basically. He said the models were based -- the models of risk were based on the past. And that's right.
But you didn't have to be a genius to know that this couldn't continue forever and that the question -- what happens when prices go down? -- should have been asked by a lot of people in the whole system.
JUDY WOODRUFF: You're saying beyond the Fed?
ALICE RIVLIN: Certainly beyond the Fed.
JUDY WOODRUFF: John Cassidy, the other -- go ahead.
JOHN CASSIDY: I mean, I agree with that. I don't think Greenspan is wholly responsible. Obviously, he's not.
You know, the investors were responsible; the bankers were responsible; the media was responsible for not reporting more aggressively on this.
But, you know, the head of the Federal Reserve is meant to be the most senior regulator in the country. And in this instance, you know, he stands accused of making two major mistakes: one, keeping interest rates low for too long and allowing a housing bubble to occur; and, B, abdicating his responsibility as a regulator.
He didn't really address the first of those things today. He did address the second and said he made a partial mistake in not agreeing to the regulation of credit default swaps. But that was the first time he said anything like that. And it was a semi-mea culpa, I guess you'd call it, but I don't think it went all the way.
JUDY WOODRUFF: And, Alice Rivlin, what about that? I mean, he did acknowledge today -- he said he's found a flaw in his understanding, what had been his understanding of how credit markets work. Is that -- how significant...
ALICE RIVLIN: Oh, I think that's very significant, and it isn't just Alan Greenspan. A lot of people were very committed to an ideology, to use that word, that said markets work perfectly or almost perfectly to channel capital into the right places and to correct mistakes.
Well, they don't. When we get into a situation where we have this collective delusion that something that can't go on forever is going to go on forever, we need something to pull us back from the brink.
And I think we'll now have more sensible regulation. I hope we don't over-regulate, but regulation that is somewhere in the middle between "markets always work" and "markets don't work at all."
We need markets. But we need to correct the rules and modernize the regulation so it keeps up with the fast changes.
Debating Greenspan's influence
JUDY WOODRUFF: John Cassidy, is it so clear that, if the decisions that the committee was grilling Alan Greenspan and John Snow and Chris Cox about today, if those decisions had been different, that everything we're going through now could have been avoided or what?
JOHN CASSIDY: I mean, that's an impossible question to answer. I mean, Greenspan's supporters would say that he couldn't have made the difference. I'd say I don't think -- the counterfactual is impossible to define, but I think it would have made some difference.
I mean, these markets just weren't regulated, the credit default swaps. And as Alice says, the mortgage markets were only regulated at the local level.
There were people inside the Fed who were raising issues about these things. Ned Gramlich, the late Ned Gramlich, who was a Fed governor, did issue some warnings to Greenspan and was ignored.
Brooksley Born, the ex-head of the Commodity Futures Trading Commission, tried to get her agency to regulate some of these derivatives and Greenspan brushed her off.
Now, would that have made all the difference? I don't know. It is very, very difficult to deal with a speculative bubble once it gets going. But what you can try and do is try and stop one beginning in the first place. And I think, you know, most of the mistakes were made early on.
JUDY WOODRUFF: How much difference do you think it would have made?
ALICE RIVLIN: I think it would have made some difference. I don't agree that keeping interest rates too low, too long was a major part of it. With hindsight, it might seem to be.
But the Fed was in a difficult situation, because the economy wasn't growing very well. There wasn't any inflation. They're supposed to look after the whole economy.
And the real question is, should they have used interest rates to slow down a housing bubble and punish the rest of the economy? I don't think that would have been possible.
It would have meant raising interest rates so high that it would have killed economic growth. And some of the same people that are fussing it, Mr. Greenspan now, would have begun outraged by that.
Steps for the future
JUDY WOODRUFF: Does today -- John Cassidy, does what we heard today provide clarity, in terms of what should be done in the future?
JOHN CASSIDY: I think today was more about, you know, what happened in the past. Everybody -- even Greenspan, it appears -- now agrees that there needs to be some form of regulation of these products.
When you get into the details, it's very complicated about what actually needs to be done. I think what's going to have to happen is the next president is going to have to appoint some sort of bipartisan panel or some experts panel, perhaps led by Greenspan's predecessor, Paul Volcker, or somebody of that stature, to come up with a set of detailed suggestions which Congress can then deal upon.
Because one thing we've seen -- I know Greenspan stressed today quite correctly -- the financial system is now incredibly complicated, with all sorts of markets in all sorts of places interconnected. So, you know, you can't rush into regulating.
And as Alice said, there is a danger of over-regulating. But I think something needs to be done.
JUDY WOODRUFF: Alice Rivlin, as we referred in the report there, Alan Greenspan was called the Oracle, the Maestro. What is his reputation -- how has all this affected him and the regard in which he's held?
ALICE RIVLIN: Well, I personally have a high regard for Alan Greenspan. I worked with him. I enjoyed it. He's very smart.
But he is ideological. He did stand in the way of modernizing our regulatory system. And I believe that was a mistake and maybe he does now, too.
The financial structure was changing very, very rapidly, new products, new institutions, and we didn't modernize the regulatory system to keep up with that.
JUDY WOODRUFF: Well, we are going to leave it there. Alice Rivlin, John Cassidy, thank you both.
JOHN CASSIDY: Thank you.