Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the
former Federal Reserve chairman once considered the infallible maestro of the financial
system, admitted on Thursday that he ?made a mistake? in trusting that free markets
could regulate themselves without government oversight.
A fervent proponent of deregulation during his 18-year tenure at the Fed?s helm, Mr.
Greenspan has faced mounting criticism this year for having refused to consider cracking
down on credit derivatives, an unchecked market whose excesses partly led to the
current financial crisis.
Although he defended the use of derivatives in general, Mr. Greenspan, who left his post
in 2006, told members of the House Committee on Oversight and Government Reform
that he was ?partially? wrong in not having tried to regulate the market for credit-default
swaps.
But in a tense exchange with Representative Henry A. Waxman, the California Democrat
who is chairman of the committee, Mr. Greenspan conceded a more serious flaw in his
own philosophy that unfettered free markets sit at the root of a superior economy.
?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,? Mr. Greenspan said.
Referring to his free-market ideology, Mr. Greenspan added: ?I have found a flaw. I don?t
know how significant or permanent it is. But I have been very distressed by that fact.?
Mr. Waxman pressed the former Fed chair to clarify his words. ?In other words, you found
that your view of the world, your ideology, was not right, it was not working,? Mr.
Waxman said.
?Absolutely, precisely,? Mr. Greenspan replied. ?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.?
The oversight committee held a four-hour hearing on Thursday to determine what gaps in
the regulatory structure abetted the crisis that has roiled the world?s financial markets.
Mr. Greenspan appeared alongside Christopher Cox, the chairman of the Securities and
Exchange Commission, and John W. Snow, who served as secretary of the Treasury early
in the Bush administration.
In his prepared remarks, Mr. Greenspan said he was in ?a state of shocked disbelief?
about the breakdown in the ability of banks to regulate themselves. He also warned about
the economic consequences of the crisis, saying that he ?cannot see how we will avoid a
significant rise in layoffs and unemployment.? Consumer spending will decline, too, he
said, adding that a stabilization of home prices would be necessary to bring the crisis to its
end.
Saying that his thinking ?has evolved? in the last year, Mr. Greenspan also defended his
record. ?In 2005, I raised concerns that the protracted period of underpricing of risk, if
history was any guide, would have dire consequences,? he said. ?This crisis, however, has
turned out to be much broader than anything I could have imagined.?
Several committee members asked who would ultimately be punished for a crisis that has
ravaged their constituents? savings accounts and could eventually lead to an enormous
loss of jobs.
Representative Bill Sali, Republican of Idaho, wondered what Mr. Cox would say to
?Idaho?s mom and pop investors who have lost so much of their hard-earned savings,
their retirement funds, while some of the corporate C.E.O.?s have received, you know,
golden parachutes and those kinds of things.? He added, ?Is somebody going to go to jail?
Mr. Cox replied, ?There?s no question that somewhere in this terrible mess many laws
were broken.? But he quickly backed off a hard-line approach. ?You know, cleaning up the
mess through law enforcement after the fact ? while important, is not ideal,? he said.
?The best thing that we can do, of course, as many of you are focused on ? indeed, this
hearing is focused on this ? is to infer lessons from what happened and prevent anything
like this and this astonishing harm from happening again.?
In his prepared remarks, Mr. Greenspan said he saw ?no choice? but to impose legal
quality requirements for certain types of securities, and added that other regulatory
changes would have to be made.
But he still gestured toward his faith in free markets, however shaky it may have become.
?It is important to remember, however, that whatever regulatory changes are made, they
will pale in comparison to the change already evident in today?s markets,? he said. Those
markets for an indefinite future will be far more restrained than would any currently
contemplated new regulatory regime.
At one point, Mr. Greenspan appeared to question the efficacy of increased oversight over
the financial system, noting, ?I think that it?s interesting to observe that we find failures of
regulation all the time.?
?If we are right 60 percent of the time in forecasting, we?re doing exceptionally well,? Mr.
Greenspan said. ?That means we are wrong 40 percent of the time. We at the Federal
Reserve had a much better record forecasting than the private sector, but we were wrong
quite a good deal of the time.?
The responses from the panel were met with little sympathy from Representative John A.
Yarmuth, a Democrat from Kentucky, who likened the three witnesses to Bill Buckner, the
former first baseman for the Red Sox whose notorious error cost his team the 1986 World
Series.
?All of you let the ball go through your legs,? Mr. Yarmuth said, using Mr. Buckner?s
mistake as a metaphor. ?And you didn?t want to let the ball go through your legs, you
didn?t try to let the ball go through your legs, but it got through.?
I had faith in him back-then, because I didn't have the temperment to understand economics at that-high-of-a-level. Turns-out he was as over-rated as a subprime loan-bundle.
