Greenspan Defends Fed’s Role in Run-up to Financial Crisis
Former Federal Reserve Chairman Alan Greenspan appeared before a congressional committee investigating the causes of the financial crisis on Wednesday. His message: The Federal Reserve is not to blame for the meltdown.
Responding to criticism that the Fed did not crack down on subprime lending, Greenspan told the committee he warned about the exotic loans in 1999, 2001 and again in 2004. Had he tried to tame the then booming housing market, “the Congress would have clamped down on us,” Greenspan said. “There is a lot of amnesia that’s emerging, apparently.”
Greenspan instead pointed to government-sponsored enterprises Fannie Mae and Freddie Mac as two of the main forces behind the bursting of the housing bubble, noting the firms drove prices up in 2003 and 2004 through their purchase of nearly half of all subprime mortgage securities.
Committee members remained largely unconvinced, though, hammering Greenspan over regulatory lapses at the Fed.
“Was there just a reluctance to regulate, a belief that regulation was not the right tool?,” Phil Angelides, the chairman of the Financial Crisis Inquiry Commission — a bipartisan panel appointed by Congress, asked Greenspan. “You could’ve, you should’ve and you didn’t” regulate hard enough, Angelides added.
Brooksley Born, a panel commissioner and chairman of the U.S. Commodity Futures Trading Commission under the Clinton administration, went further, saying, “The Fed utterly failed to prevent the financial crisis. The Fed and other banking regulators failed to prevent the housing bubble, they failed to prevent the predatory lending scandal, they failed to prevent our biggest banks and holding companies from engaging in activities that would bring them to the verge of collapse without massive taxpayer bailouts.”
Greenspan said he “fundamentally” disagreed with Born’s assessment, and in prepared testimony argued regulators cannot be charged with predicting financial crises.
“Regulators who are required to forecast have had a woeful record of chronic failure,” according to Greenspan, who added, “History tells us they cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be.”
Yet there are steps regulators can take to help stave off the next crisis, according to Greenspan. Policy makers can place higher capital and collateral requirements on the financial sector to “make the financial system more resilient in the face of inherently unforeseeable shocks,” he said.