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Greenspan Admits ‘Flaw’ to Congress, Predicts More Economic Problems

Former Fed Chair Alan Greenspan told Congress Thursday the economic crisis unveiled "a flaw" in his view of world markets. Economic analysts discuss his testimony and legacy.

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    Judy Woodruff has our financial crisis story tonight.


    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.


    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?




    Democrats on the committee, led by the chairman, Henry Waxman of California, pressed Greenspan on whether his fundamental economic philosophy was mistaken.


    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?


    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.


    You found a flaw in the reality…


    Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.


    In other words, you found that your view of the world, your ideology, was not right, it was not working?


    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.


    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?


    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.


    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.


    Greenspan and Cox contended regulators cannot predict crises. Chairman Waxman took issue with that.


    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.


    Greenspan, who was once dubbed the Oracle in the world of finance, said his predictive powers were limited.


    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?